Which is a cash outflow?

wages paid to employees. It is money leaving the business.

Cash inflows are $12 000 and cash outflows are $9500. What is the net cash flow?

$2500. 12 000 − 9500 = $2500.

The opening balance is $800 and the net cash flow is −$1300. What is the closing balance?

−$500. 800 − 1300 = −$500.

Why do banks ask to see a cash-flow forecast before giving a loan?

to see whether the business will be able to make the repayments. It shows whether cash will be there when repayments fall due.

Which would improve a business's cash flow in the short term?

delaying payments to suppliers. Cash stays in the business for longer.

Cash and cash-flow forecasts · Edexcel IGCSE Business

In plain words

Cash is the money a business can actually spend today. It pays the wages on Friday and the supplier at the end of the month. A business with full order books and no cash in the bank is in real danger.

So businesses look ahead, month by month, at what will come in and what will go out. That is a cash-flow forecast.

7 things to know

Cash inflows are money coming in: sales, loans, money put in by owners. Cash outflows are money going out: wages, materials, rent, loan repayments.
Net cash flow = cash inflows − cash outflows.
Closing balance = opening balance + net cash flow. Each month's closing balance is the next month's opening balance.
A forecast warns of shortages in time to do something about them, and banks ask for one before lending.
Ways to solve a short-term cash-flow problem: arrange an overdraft, delay payments to suppliers, ask customers who owe money to pay sooner, and put off spending.
Cash is not profit: a sale made on credit counts towards profit today, but brings in no cash until the customer pays.
Working capital is the money available for day-to-day running: current assets minus current liabilities.

Worked example

A business starts the month with $2000 in the bank. It expects cash inflows of $9000 and outflows of $10 500. What is its closing balance?

Net cash flow = 9000 − 10 500 = −$1500.
Closing balance = opening balance + net cash flow = 2000 − 1500.
Closing balance = $500.

Tips and tricks

A negative net cash flow is not a disaster if the opening balance covers it. A negative closing balance is the problem: that is when an overdraft is needed.
Brackets around a number in a forecast mean that it is negative.

5 questions, about 2 minutes.

It lands in your notebook with its questions as flashcards.

Cash and cash-flow forecasts: 5 questions and answers

These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.

Which is a cash outflow?
- money from sales
- a loan received from a bank
- wages paid to employees (the answer)
- money invested by the owner
It is money leaving the business.
Cash inflows are $12 000 and cash outflows are $9500. What is the net cash flow?
- $2500 (the answer)
- −$2500
- $21 500
- $9500
12 000 − 9500 = $2500.
The opening balance is $800 and the net cash flow is −$1300. What is the closing balance?
- $2100
- $500
- −$500 (the answer)
- −$2100
800 − 1300 = −$500.
Why do banks ask to see a cash-flow forecast before giving a loan?
- to find out who the customers are
- to see whether the business will be able to make the repayments (the answer)
- to set the business's prices
- to check its advertising
It shows whether cash will be there when repayments fall due.
Which would improve a business's cash flow in the short term?
- paying suppliers earlier
- giving customers longer to pay
- delaying payments to suppliers (the answer)
- buying new machinery now
Cash stays in the business for longer.

5 questions

Tap an answer and you’ll see straight away whether it’s right, and why.

Worksheet

4 questions, 11 marks. Write your answers on paper, then check them.

Cash and cash-flow forecasts

Edexcel International GCSE Business 4BS1 · 11 marks · papermunch.org

Name ______________________________ Date ______________

State the formula for net cash flow.[2]
Show answerHide answer
Net cash flow = cash inflows − cash outflows.
I got this one
A business has an opening balance of $1500, cash inflows of $6000 and cash outflows of $8200. Calculate the net cash flow and the closing balance.[3]
Show answerHide answer
Net cash flow = 6000 − 8200 = −$2200. Closing balance = 1500 − 2200 = −$700.
I got this one
Explain two ways a business could solve a short-term cash-flow problem.[3]
Show answerHide answer
It could arrange an overdraft with its bank to cover the shortage. It could ask customers who buy on credit to pay more quickly, so that cash comes in sooner.
I got this one
Explain why a profitable business can run out of cash.[3]
Show answerHide answer
It may sell on credit, so the profit is recorded before the cash arrives. Meanwhile it still has to pay wages and suppliers, and if these fall due first it has no cash to pay them.
I got this one

Answers: Cash and cash-flow forecasts

1. Net cash flow = cash inflows − cash outflows.
2. Net cash flow = 6000 − 8200 = −$2200. Closing balance = 1500 − 2200 = −$700.
3. It could arrange an overdraft with its bank to cover the shortage. It could ask customers who buy on credit to pay more quickly, so that cash comes in sooner.
4. It may sell on credit, so the profit is recorded before the cash arrives. Meanwhile it still has to pay wages and suppliers, and if these fall due first it has no cash to pay them.