Cash = liquid working capital. It is the money a business can use immediately to meet day‑to‑day obligations.
Cash underpins the three core purposes of a business:
Survival – without sufficient cash a firm cannot pay wages, rent or supplier invoices.
Growth – cash is needed to purchase new equipment, expand premises or launch a marketing campaign.
Profit – profit is the excess of revenue over expenses, but profit only becomes useful when it can be turned into cash.
Good cash management improves:
Liquidity – the ability to meet short‑term debts.
Credibility – banks, investors and suppliers are more willing to trade with a firm that can demonstrate cash stability.
Working‑capital efficiency – maintaining an optimal balance of inventory, receivables and payables so that cash is not tied up unnecessarily.
2. What is a cash‑flow forecast?
A cash‑flow forecast is a projected statement showing the amount of cash a business expects to receive (inflows) and to pay out (outflows) over a future period – usually weekly, monthly or quarterly. It predicts the cash position at any point in time, not the level of profit.
2.1 Cash‑flow forecasting vs. budgeting
Both are planning tools, but they serve different purposes:
Cash‑flow forecast – records only actual cash movements; used to monitor liquidity and avoid shortfalls.
Budget (profit forecast) – records revenue and expenses on an accrual basis; used to set targets for sales, costs and profit.
2.2 Cash‑flow forecast ≠ profit forecast
Aspect
Cash‑flow forecast
Profit (budget) forecast
Basis of measurement
Actual cash receipts & payments
Accrued revenue & expenses
Timing
When cash actually moves
When income or expense is earned/incurred
Primary purpose
Assess liquidity and plan cash needs
Set performance targets and evaluate profitability
Typical users
Cash managers, finance directors
Strategic planners, senior management
3. How to construct a simple cash‑flow forecast
Follow these five steps for each period (e.g., month). The command words are taken directly from the IGCSE syllabus.
Calculate net cash flow using the formula: Net Cash Flow = Total Cash Inflows – Total Cash Outflows
Determine the opening cash balance (cash on hand at the start of the period).
Compute the closing cash balance and the cash buffer (margin of safety): Closing Balance = Opening Balance + Net Cash Flow Cash Buffer = Closing Balance – Minimum Required Cash
Month
Cash Inflows (£)
Cash Outflows (£)
Net Cash Flow (£)
Opening Balance (£)
Closing Balance (£)
Cash Buffer / Margin of Safety (£)
January
12,000
9,500
2,500
5,000
7,500
2,500
February
10,000
11,200
-1,200
7,500
6,300
1,300
March
13,500
9,800
3,700
6,300
10,000
5,000
4. Interpreting the simple forecast
Trend analysis: Cash inflows rise from January (£12,000) to March (£13,500) while outflows stay relatively stable.
Identify shortfalls: February shows a negative net cash flow of £1,200, reducing the cash buffer to £1,300.
Margin of safety: The buffer indicates how much cash is available above the minimum required to meet obligations.
Guided question (AO3)
What would happen to the cash buffer if February’s outflows increased by £500 (to £11,700) while inflows remain £10,000?
Students should recalculate the net cash flow (‑£1,700) and the closing balance (£5,800), giving a new cash buffer of £800 – a further reduction in safety margin.
Scenario: The business can either (a) obtain a £2,000 bank loan in February or (b) cut non‑essential spending by £500.
Option (a) – Loan
Adjusted February inflows: £10,000 + £2,000 = £12,000
Net Cash Flow = £12,000 – £11,200 = £800
Closing Balance = £7,500 + £800 = £8,300
Cash Buffer = £8,300 – £5,000 (minimum) = £3,300
Option (b) – Cost reduction
Adjusted February outflows: £11,200 – £500 = £10,700
Net Cash Flow = £10,000 – £10,700 = ‑£700
Closing Balance = £7,500 – £700 = £6,800
Cash Buffer = £6,800 – £5,000 = £1,800
Evaluation rubric
Criterion
Loan (a)
Cost reduction (b)
Impact on cash buffer
Large increase (£3,300)
Moderate increase (£1,800)
Cost to business
Interest expense
Reduced marketing/operations
Risk
Higher debt level
Potential loss of sales
Best justified answer
Explain why the loan is preferable if the firm can service interest, otherwise recommend the cost reduction.
Justify the most appropriate remedy: Students should weigh the immediate cash benefit against longer‑term costs and risk, then state a reasoned choice.
6. Short‑term cash‑flow problems and grouped remedies (AO4)
Problem 4: Unexpected large outflows (e.g., equipment repair)
Remedies: maintain a contingency reserve, arrange a short‑term line of credit, consider leasing instead of buying.
Recommendation question (AO4)
For a small retail business that frequently experiences seasonal cash shortfalls, which single remedy would you recommend and why?
Students should select the most suitable option (e.g., an overdraft facility) and justify the choice by linking it to the business’s cash‑flow pattern, cost, and flexibility.
7. Key take‑aways
Cash is the lifeblood of a business – it enables survival, growth and the realisation of profit.
A cash‑flow forecast predicts future cash positions; it does not predict profit.
Cash‑flow forecasting differs from budgeting: the former tracks actual cash movements, the latter records accrued revenue and expenses.
Construct a forecast by identifying inflows and outflows, calculating net cash flow, determining opening balances, and computing closing balances and cash buffers.
Regularly update the forecast and test “what‑if” changes to stay ahead of short‑term cash problems.
Early identification of a cash shortfall allows managers to take corrective action (borrowing, cutting costs, negotiating terms) before a crisis occurs.
Suggested diagram: a line graph showing opening balance, cash inflows, cash outflows and closing balance for the three months.
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