Business AS · Finance and accounting. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.
A cash flow forecast is an estimate of the cash a business expects to receive and pay out, month by month, over a future period. It shows when the business may run short of cash, so managers can act early, for example by arranging an overdraft. Banks often ask for one before they lend.
Each month has the same pattern. Start with the opening balance, add the cash inflows, subtract the cash outflows and you have the closing balance. That closing balance becomes the opening balance of the next month.
Only cash movements are included, in the month the cash moves. A credit sale appears when the customer pays. A forecast is only as good as its estimates.
Take care with negative balances. A closing balance of −$1,700 followed by a net cash flow of +$1,300 gives −$400, not $3,000.
Answer: −$400: the business needs an overdraft or another way to cover the shortage in both months.
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