Cash-flow forecasting and working capital
Introduced| English | Meaning |
|---|---|
| cash flow/kæʃ fləʊ/ | The movement of money into and out of a business over time. |
| cash-flow forecast/kæʃ fləʊ ˈfɔːkæst/ | An estimate of future cash inflows, outflows and balances over a specified period. |
| inflows/ˈɪnfləʊz/ | inflows |
| outflows/aʊtˈfləʊz/ | outflows |
| net cash flow/net kæʃ fləʊ/ | A change; the closing balance is a position. |
| working capital/ˈwɜːkɪŋ ˈkæpɪtl/ | working capital |
| current assets/ˈkʌrənt ˈæsets/ | Assets expected to be used, sold or converted into cash within the normal operating cycle or a year. |
| current liabilities/ˈkʌrənt ˌlaɪəˈbɪlɪtiz/ | Obligations expected to be settled within the normal operating cycle or a year, as defined in the accounting framework used. |
Why can a busy shop struggle to pay its suppliers?
- A shop can record sales before customers pay. Its bills may fall due first, so sales and profit do not show how much cash is available today.
- Cash flow 现金流 records the timing of money received and paid. A cash-flow forecast 现金流预测 helps the owner plan expected receipts and payments before the payment deadline.
Separate flows from balances
- Inflows 流入 are cash received, such as customer payments or a bank loan. Outflows 流出 are cash paid, such as wages, suppliers or equipment purchases. Borrowing is a cash inflow, not sales revenue or profit.
- Net cash flow 净现金流 = inflows − outflows for the period. Closing cash balance = opening balance + net cash flow. That closing balance becomes the next period's opening balance.
Cash-flow forecasting
A forecast of cash in and out each month warns a business of a cash shortage before it strikes.
Inflows are 40 and outflows are 52. What is the net cash flow?
Difficulty 2/5 · 140 coins + a small bonus on first completion today
Net cash flow = 40 − 52 = −12.
Carry the closing balance forward
- In this bakery example, all figures are in £000. January opens at 8, with inflows 30 and outflows 28. Net cash flow is +2 and closing balance is 10. February therefore opens at 10, not 8.
- The same regular flows give closings of 12 in February and 14 in March. An extra oven payment of 18 in April makes April outflows 46, net cash flow −16 and closing balance −2. A negative forecast balance shows a funding gap that needs an agreed solution.
In May, opening balance is −2, inflows 30 and outflows 28. Closing balance is −2 + 2 = 0; June closes at 2. A positive June balance does not solve April's earlier shortage. A forecast identifies when funds are needed, not just the final total.
Bakery six-month forecast (£000)
Track the worked bakery forecast and identify why April needs funding even though June ends positive.
Opening balance 15, net cash flow −6. What is the closing balance?
Difficulty 2/5 · 140 coins + a small bonus on first completion today
Closing = opening + net cash flow = 15 + (−6) = 9.
The main purpose of a cash-flow forecast is to:
Difficulty 1/5 · 100 coins + a small bonus on first completion today
It flags cash shortages early.
A shop opens May with £1200. May inflows are £3500 and outflows £5000. Find the closing balance in £, including its sign.
Difficulty 2/5 · 140 coins + a small bonus on first completion today
Net flow=3500−5000=−£1500. Closing=1200−1500=−£300, a funding gap.
May closes at −£300. June inflows are £6000 and outflows £4200. Find June closing balance in £.
Difficulty 2/5 · 140 coins + a small bonus on first completion today
June opens at −£300. Net flow=6000−4200=£1800; closing=−300+1800=£1500.
Distinguish cash from profit
- A credit sale of £200 with cost of sales £120 contributes £80 to gross profit before other expenses. If the customer pays next month, no sales cash is received this month. The £200 sale is revenue, not £200 profit.
- An equipment purchase is a cash outflow when paid; a loan receipt is a cash inflow. These cash movements are not simply the period's sales or expenses. A profitable business can still lack cash when bills fall due.
Negative net cash flow does not always mean a negative closing balance: opening cash can cover it. Positive net cash flow does not always remove an existing shortage. Calculate both the flow and the resulting balance.
A profitable business can still run out of cash.
Difficulty 1/5 · 100 coins + a small bonus on first completion today
Profit is not cash — credit sales and stock tie up money.
A business receives a £4000 bank loan. How should that receipt be treated?
Difficulty 1/5 · 100 coins + a small bonus on first completion today
Borrowing brings cash into the bank and creates an obligation to repay; it is not a sale.
Working capital 营运资金 includes more than cash
- Working capital = current assets 流动资产 − current liabilities 流动负债. Current assets include cash, stock and amounts owed by customers; current liabilities include amounts due to suppliers and other short-term debts.
- A shop with cash 2, stock 9 and customer debts 7 has current assets 18. If current liabilities are 12, working capital is 6, all in £000. Only 2 is cash now. Stock must sell and customers must pay before those assets can pay a bill.
Working capital equals current assets minus current ______.
Difficulty 1/5 · 100 coins + a small bonus on first completion today
Working capital is current assets less current liabilities. It includes stock and amounts owed by customers, so it is not simply available cash.
Current assets are cash £5000, stock £8000 and customer debts £3000. Current liabilities are £10000. Find working capital in £.
Difficulty 2/5 · 140 coins + a small bonus on first completion today
Current assets=5000+8000+3000=£16000; working capital=16000−10000=£6000. Cash itself is £5000.
A firm has positive working capital but much of it is slow-selling stock and unpaid customer invoices. Which conclusion is justified?
Difficulty 1/5 · 100 coins + a small bonus on first completion today
The timing and form of current assets matter. A positive working-capital total is not an immediately available cash balance.
Match a remedy to the timing problem
- An agreed overdraft can cover a short gap, but it has a limit and may carry interest or fees. Asking customers to pay sooner may release cash; an early-payment discount reduces the amount received.
- Negotiate longer supplier terms, reduce excess stock or postpone non-essential spending where appropriate. Suppliers may refuse; too little stock can lose sales; delaying essential equipment can limit production. Choose from the actual case, rather than listing every remedy.
Update the forecast when assumptions change
- Record receipts in the period cash is expected, not automatically when the sale occurs. Moving a customer's payment to a later month can create an earlier gap even when total receipts are unchanged.
- Forecasts depend on estimates of sales, payment dates and costs. Compare actual results with the forecast, investigate differences, and revise the remaining months. A favourable year-end total does not make every week's payments affordable.
A forecast closing balance is £900. A £1400 customer receipt is delayed to the next month; all other current-month flows are unchanged. Find the revised closing balance in £.
Difficulty 2/5 · 140 coins + a small bonus on first completion today
Revised closing=900−1400=−£500. Total receipts across both months can be unchanged while this month has a gap.
Complete and explain a fresh forecast
- Work period by period: inflows minus outflows, then opening balance plus the net flow. Carry the closing balance into the next period and identify the first funding gap.
- Recommend a feasible action before that gap, using its amount and timing. Explain the cost or risk and the evidence needed to check whether the remedy is enough.
Net cash flow is a change; the closing balance is a position. Profit, working capital and cash are different measures. A useful forecast supports a timely, justified decision.
Inflows are 65, outflows are 48 and the opening balance is 10. What are the net cash flow and the closing balance, and why can a profitable credit sale still leave the firm short of cash?
Net cash flow is inflows minus outflows. Closing balance is the opening balance plus that net flow.
Cash inflows are 65, outflows 48 and opening balance 10, in the same money units. What is the net cash flow?
Difficulty 1/5 · 100 coins + a small bonus on first completion today
65 minus 48 is 17. Adding the opening balance of 10 gives the closing balance of 27. Other options — Minus 12 (the lesson example's result for inflows of 40 and outflows of 52); 27 (the closing balance).
A retailer forecasts a £3000 cash gap for one month. An approved overdraft can cover £4000 at a total cost of £60 for that month. A reliable customer will instead pay a £3000 invoice early, less a £150 discount. The gap is forecast to close next month. Recommend an action, checking the amount received, costs, timing and one risk.
Compare your calculation and reasoning with the criteria. Other recommendations can be valid when supported by the case evidence and a realistic condition.
A shop starts July with £2000. Receipts are forecast at £6000 and payments at £7000. August receipts are £8000 and payments £6500. Later, £1500 of July receipts is delayed until August. Calculate both months’ revised closing balances and explain why a good August result does not remove the need to act in July.
Compare your calculation and reasoning with the criteria. Other recommendations can be valid when supported by the case evidence and a realistic condition.
A manager says: “Working capital is £6000, so our £6000 bill can definitely be paid today.” The current assets include stock and customer debts. Explain why more information is needed.
Compare your calculation and reasoning with the criteria. Other recommendations can be valid when supported by the case evidence and a realistic condition.