Calculating the cash flow

This is an example of a cash flow forecast for the next three months:

ItemJanFebMar
Opening bank balance£2,000£1,000£-1,250
Total receipts (money in)£500£750£5,000
Total spending (money out)£1,500£3,000£2,000
Closing bank balance£1,000-£1,250£1,750

At the beginning of January, the business has £2,000 worth of cash. You can see that the total flow of cash into the business (receipts) for January is expected to be £500, and that the total outflow from the business (expenditure) is £1,500. There is a net outflow of £1,000 which means the projected bank balance at the beginning of February is only £1,000.

In February, there are expected payments of £3,000 and only £750 of expected income. This means that the business is short of £1,250 cash by the end of February and cannot pay its bills. An overdraft is needed to help the business survive until March when £5,000 worth of payments are expected.

A business can improve its cash flow by:

  • reducing cash outflows - eg by delaying the payment of bills, securing better trade credit terms or factoring
  • increasing cash inflows - eg by chasing debtors, selling assets or securing an overdraft
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