Will there be enough cash in March?: It is early January 2026. The bakery has $25,000 in the bank. After Christmas the shops are quieter, but the wages, the rent and the flour from Valley Grain cost the same as ever.
And in March two extra bills land: Valley Grain's Easter flour order and the vans' insurance for the year. Will there still be enough cash in March?
Marco does not guess: He writes down, month by month, the cash he expects in and out: a cash flow forecast.
A cash flow forecast is an estimate of the cash a business expects to receive (cash inflows) and to pay out (cash outflows) in each month, or quarter, of a period ahead. It also shows the cash the business expects to have at the end of each month (the closing balance).
It is a plan for the future, so every figure in it is an estimate. It counts cash on the day it moves, which is why it can tell a different story from the profit (3.7.1).
Spot a shortage early
- Shows the months when cash will run low
- Lena's: March, when the Easter flour and the insurance are due
- Known in January, three months ahead
Plan the big payments
- Shows when the business can afford to spend
- A large payment can be timed for a month with cash to spare
- Or the cash can be arranged before it is needed
Win a loan
- Banks ask for a forecast before they lend
- It shows the lender how, and when, it will be repaid
- Investors and new partners ask for one too
Keep cash under control
- Each month, the real figures are set beside the forecast
- A gap shows where cash is going that was not planned
- The forecast is then updated for the months ahead
Only as good as its guesses: Every line of a forecast is an estimate. A rainy spring can cut shop sales, Valley Grain can raise the price of flour, a hotel can pay its bill late.
Check it every month: So a forecast is never certain, and the further ahead it looks, the less certain it is. That is why Marco checks it against the real figures every month and updates it.
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Every cash flow forecast has the same skeleton. The months run across the top. Five lines run down the side, always in this order.
| Line | What goes in it | Lena's Bakery Ltd, January 2026 |
|---|---|---|
| Opening balance | The cash in the bank at the start of the month | $25,000 |
| Cash inflows | A row for each source of cash, then total cash inflows | $118,000 |
| Cash outflows | A row for each payment, then total cash outflows | $126,000 |
| Net cash flow | Total cash inflows − total cash outflows | ($8,000) |
| Closing balance | Opening balance + net cash flow | $17,000 |
Three rules hold every forecast together: Net cash flow = total cash inflows − total cash outflows
Closing balance = opening balance + net cash flow
Next month's opening balance = this month's closing balance. A negative figure goes in brackets: ($8,000) means $8,000 more went out than came in.
Only cash goes in, in the month it moves. The shops' sales are cash on the day. The cafés and hotels that buy wholesale bread pay later, so their money goes in the month it reaches the bank, not the month the bread was delivered.
Payments work the same way. Valley Grain is paid 30 days after it delivers, so the flour delivered in December is paid for in January.
Inflows can be cash sales, cash from customers who bought on credit, a bank loan when it arrives, or money the owners put in. Outflows can be paying suppliers, wages, rent, a loan repayment or a new machine.
Two details that are easy to get wrong: Money in before trading starts. When a new business begins with the owner's savings and a bank loan, that money is the opening balance of month 1. It is not a month-1 cash inflow as well.
Call it net cash flow. It is not a profit, so never label the line 'net profit' or 'profit'.
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Back to Marco. These are the figures he expects for January to March 2026.
| Lena's Bakery Ltd, January to March 2026 | Figure |
|---|---|
| Cash in the bank on 1 January | $25,000 |
| Shop sales, all cash | January $102,000, February $98,000, March $107,000 |
| Cafés and hotels paying for wholesale bread | January $16,000, February $16,000, March $18,000 |
| Wages and salaries | $62,500 a month |
| Flour and ingredients: Valley Grain, paid 30 days after delivery | $40,000 a month |
| Rent, utilities and other costs | $23,500 a month |
| Valley Grain's Easter flour order | $12,000, paid in March |
| The vans' insurance for the year | $10,000, paid in March |
Building the forecast, month by month
The heading and the opening balance
Name the business and the months, and write 'all figures in $'. January's opening balance is the $25,000 in the bank.
Cash inflows, then their total
One row for shop sales and one for the cafés and hotels. January: $102,000 + $16,000 = $118,000.
Cash outflows, then their total
One row for each payment. January: $62,500 + $40,000 + $23,500 = $126,000. The Easter flour and the insurance go in March only.
Net cash flow
Total inflows − total outflows. January: $118,000 − $126,000 = ($8,000), in brackets because it is negative.
Closing balance, then carry it across
Opening balance + net cash flow. January: $25,000 + ($8,000) = $17,000, which becomes February's opening balance. Repeat for each month.
| Lena's Bakery Ltd: cash flow forecast, January to March 2026 (all figures in $) | January | February | March |
|---|---|---|---|
| Opening balance | 25,000 | 17,000 | 5,000 |
| Cash inflows | |||
| Shop sales | 102,000 | 98,000 | 107,000 |
| Cafés and hotels paying | 16,000 | 16,000 | 18,000 |
| Total cash inflows | 118,000 | 114,000 | 125,000 |
| Cash outflows | |||
| Wages and salaries | 62,500 | 62,500 | 62,500 |
| Flour and ingredients | 40,000 | 40,000 | 40,000 |
| Rent, utilities and other costs | 23,500 | 23,500 | 23,500 |
| Easter flour order | 12,000 | ||
| Vans' insurance | 10,000 | ||
| Total cash outflows | 126,000 | 126,000 | 148,000 |
| Net cash flow | (8,000) | (12,000) | (23,000) |
| Closing balance | 17,000 | 5,000 | (18,000) |
What the forecast tells Lena and Marco: More cash goes out than comes in every month, so the balance falls: $17,000, then $5,000. In March, with the two extra bills, it ends $18,000 short: the account would be overdrawn.
They know this in early January, three months ahead. That is time to act before March, instead of finding out when the bills arrive.
Many questions hand you a forecast that is nearly finished, with a few gaps marked W, X, Y or Z. Every gap is one of the three rules, used forwards or backwards.
Which rule fills which gap
- Total cash outflows: add the outflow rows. Or work back: total cash inflows − net cash flow.
- Total cash inflows: add the inflow rows. Or work back: total cash outflows + net cash flow.
- Opening balance: the closing balance of the month before.
- Net cash flow: total cash inflows − total cash outflows. Or closing balance − opening balance.
- Closing balance: opening balance + net cash flow, keeping the brackets.
Four gaps in Lena's forecast
W: January's total cash outflows
$62,500 + $40,000 + $23,500 = $126,000.
X: March's total cash inflows
Worked back from the totals: $148,000 + ($23,000) = $125,000. Adding the rows, $107,000 + $18,000, gives the same.
Y: March's opening balance
February's closing balance: $5,000.
Z: March's closing balance
$5,000 + ($23,000) = ($18,000). Adding a negative is taking away: 5,000 − 23,000.
Other questions give the raw figures in words. Some rows need care before they go in the table.
| The table says | What goes in the forecast | Example |
|---|---|---|
| A cost 'every third month, starting in month 1' | Months 1 and 4 only; the other months stay empty | Electricity $800 in June and September |
| Sales 'rise by 10% each month' | Each month is the month before × 1.1 | $2,000, $2,200, $2,420, $2,662 |
| Purchases 'equal to 50% of monthly sales' | Half of the same month's sales, month by month | Sales $48,000, purchases $24,000 |
| A payment of '10% of the previous month's closing balance' | Worked out from the closing balance just above it, one month late | Closing $24,000 in month 1, so $2,400 in month 2 |
| 'The owner puts in savings and a loan before opening' | Month 1's opening balance, not a month-1 inflow | $2,000 + $3,000 = opening balance $5,000 |
Change one figure, change every month after it: Suppose January's shop sales are $96,000, not $102,000. January's inflows fall by $6,000, so January closes at $11,000.
February now opens at $11,000 and closes at ($1,000); March closes at ($24,000). One change moves every closing balance after it by the same amount: recalculate them all.
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How this comes up: A table of raw figures and one instruction: prepare a cash flow forecast for four months, for six marks.
What the table holds
- A price
- Monthly costs
- A cost that comes every few months
- Sales that grow
Other versions
- A new business version asks you to complete just the five lines, for four marks.
- Shorter parts ask for one missing figure, with no working needed.
- Or they ask how the forecast helps the owner run the business.
The six-mark pattern
- Heading. The business, the months, and 'all figures in $'.
- Opening balance on the first line, for every month.
- Cash inflows: a heading, one row for each inflow, then total cash inflows.
- Cash outflows: a heading, one row for each payment in the month it is paid, then total cash outflows.
- Net cash flow, negatives in brackets, then closing balance, carried across as the next opening balance.
The costly habits: Writing only the five total lines, with no row for each item: even with every figure right, that cannot get full marks.
Calling net cash flow 'profit', or putting every payment on a single row: each costs a mark. So does a cost in the wrong month, though the balances after it are then checked against your own figures.
Using the table, prepare a cash flow forecast for the kiosk for June to September 2026.
Model answer plan
See the answer broken into clear points, with guidance on how each point earns marks.