Think of it as a budget planner for your business’s money. It tells you how much cash you expect to receive (inflows) and spend (outflows) over a period, usually month‑by‑month. The goal is to avoid running out of cash or having too much idle money.
The relationship is simple:
\$C{\text{closing}} = C{\text{opening}} + C{\text{inflows}} - C{\text{outflows}}\$
| Month | Opening Balance ($) | Cash Inflows ($) | Cash Outflows ($) | Closing Balance ($) |
|---|---|---|---|---|
| January | $5,000 | $3,200 | $2,500 | $5,700 |
| February | $5,700 | $2,800 | $3,000 | $5,500 |
| March | $5,500 | $4,000 | $2,200 | $7,300 |
Notice how the closing balance becomes the opening balance for the next month. This “rolling” method keeps the forecast continuous.
• When asked to amend a forecast, first identify the error (e.g., missing inflow).
• Re‑calculate the affected month’s closing balance using the formula above.
• Remember: each month’s opening balance equals the previous month’s closing balance.
• Show all steps clearly – examiners appreciate a tidy, logical approach.
• Use emojis or colour coding in your notes to keep track of changes, but keep the final answer neat and readable.
Imagine a calendar where each day you write down how much money you expect to receive and spend. By the end of the month, you can see if you’ll have enough to pay the rent or if you need to save a bit more. That’s exactly what a cash flow forecast does for a business – it keeps the money moving smoothly, just like a well‑planned personal budget keeps your allowance from running out before the next payday.