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Finance

Cash flow and cash flow forecasts

  • 3 things to know
  • Paper 2

Overview

Cash inflows and outflows, building a cash flow forecast, net cash flow and opening and closing balances worked through examples, cash against profit, and ways to solve a cash shortage.

What you need to know

Answer each one before you reveal it.

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Key term

What are the opening and closing balances in a cash flow forecast?

Key term

A shop has cash inflows of £18,000 and cash outflows of £21,000 in March. What is its net cash flow?

Key term

Which solution would suit a toy shop that is short of cash every autumn before Christmas?

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    What is cash flow?

    Model answer

    Cash flow is the movement of money into and out of a business over a period. Money coming in is a cash inflow, and money going out is a cash outflow.

  2. 2

    Why is cash important to a business?

    Model answer

    A business needs cash to pay suppliers, wages, rent and loan repayments when they are due. A business that runs out of cash can fail even if it is profitable.

  3. 3

    Give examples of cash inflows and cash outflows.

    Model answer

    Cash inflows include cash sales, payments from credit customers and loans received. Cash outflows include payments for stock, wages, rent and loan repayments.

  4. 4

    What is a cash flow forecast?

    Model answer

    A cash flow forecast predicts a business's cash inflows and outflows for each of the coming months. The forecast shows when the business may run short of cash.

  5. 5

    Why do businesses construct cash flow forecasts?

    Model answer

    A forecast warns of a future cash shortage so the business can arrange an overdraft in time. Banks also usually want a cash flow forecast before lending.

  6. 6

    What is net cash flow?

    Model answer

    Net cash flow is the difference between cash inflows and cash outflows in a period. Net cash flow equals total inflows minus total outflows.

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