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By the end of these notes, you should be able to:
Cash flow is simply the movement of money into and out of a business. Think of it like water flowing into and out of a tank — money comes in when the business earns it, and money goes out when the business spends it.
A cash flow forecast is a prediction — an educated guess — of how much money a business expects to receive and spend over a future period of time, usually 6 to 12 months.
It does not record what has already happened. Instead, it predicts what will happen. It is written before the money actually moves.
| Cash Inflows (money coming IN) | Cash Outflows (money going OUT) |
|---|---|
| Revenue from sales (selling products/services) | Purchasing stock (goods to sell) |
| Loans received from a bank | Paying staff wages and salaries |
| Interest received (earned from savings) | Paying rent for premises |
| Capital injected by the owner (owner putting their own money into the business) | Paying utility bills (electricity, water, gas) |
| Repaying bank loans |
💡 Memory tip — Inflows: SLIC — Sales, Loans, Interest, Capital 💡 Memory tip — Outflows: SWURRS — Stock, Wages, Utilities, Rent, Repayments, Salaries
A cash flow forecast is one of the most important financial tools a business can use. Here is why:
1. Starting a new business When someone sets up a new business, they need to predict how much cash they will need in the early months before they start making enough sales to cover their costs. A forecast helps them plan this from the start.
2. Running an existing business Even a business that has been trading for years can run into trouble if sales suddenly fall. A cash flow forecast helps managers spot in advance when a drop in sales might cause a cash shortage, so they can prepare — for example, by arranging an overdraft (a facility where a bank allows a business to spend more than it currently has in its account).
3. Applying for a loan or investment When a business asks a bank or investor for money, it must prove that it actually needs the money and that it will be able to pay it back. A cash flow forecast gives the bank or investor evidence of the business's financial situation — how much is needed, for how long, and when it can be repaid.
4. Managing day-to-day transactions By knowing in advance how much cash will be available in a given month, managers can decide the best time to pay bills, purchase stock, or make other payments.
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