Liquidity is important. Having money to spend helps protect against unexpected expenses and keeps the business afloat.

Cash flow forecasting links with: budgeting, inventory management, financial objectives, working capital, sales forecasting.

Cash flow is important.

  • Cash flow is a dynamic and unpredictable part of life for most businesses (particularly start-ups and SMBs).
  • Cash flow problems are the main reason why a business fails.
  • Regular and reliable cash flow forecasting can address many of the problems.

Cash inflows

  • Cash sales
  • receipts from trade debtor’s
  • sale of fixed assets
  • interest on bank balances
  • grants
  • loans from bank
  • share capital invested

Cash outflows

  • payments to suppliers
  • wages and salaries
  • payments for fixed assets
  • tax on profits
  • interest on loans and overdrafts
  • dividends paid to shareholders
  • repayment of loans

Why produce a cashflow forecast?

Efficient businesses produce accurate cashflow forecasts.

  • Advanced warning of cash shortages
  • Make sure that the business can afford to pay suppliers and employees
  • Spot problems with customer payments
  • As an important part of financial control
  • Provide reassurance to investors and lenders that the business is being managed properly

Terminology: Overdraft Facility ⇾ A service provided by a bank to allow a business to go into negative balances and later pay it off with interest.

Example cashflow forecast:

Interpreting the table

Closing balance for one month is the opening balance for the next.

  • They key to effective cashflow forecasting is reliable information
  • A good cashflow forecast is:
    • Updated regularly
    • Makes sensible assumptions
    • Allows for unexpected changes


  1. Cash flow values

A = 3500 ✓ B = 8000 ✓ C = -(4000) ✓ D = 8000 ✓

  1. Calculate net cash flow

Untrusted data below

 35000 - 34000= £1500 NOV CLOSE

(£500 + £36000) - 34000 = £3500 DEC CLOSE

(31500+36000)-(34000+34000) = -£500 NET CASH FLOW



Liquidity is how close an asset is to cash.

  • Cash is the most liquid asset
  • A building is fairly illiquid, as the process to convert it into cash is lengthy

Cash flow is important

  • Cash flow is dynamic and unpredictable
  • Cash flow is the main cause of business failure.
    • They try and grow too quickly and run out of working capital, they might be profitable, but if they run out of cash they can’t pay the bills.

Non-exhaustive lists:

  • Cash Inflows

    • Cash sales
    • Receipts from trade debtors
    • Sales of fixed assets
    • Interest on bank balances
    • Grants
    • Loans from banks
    • Share capital investments
  • Cash outflows

    • Payments to suppliers
    • Wages and salaries
    • Payments for fixed assets
    • Tax on profits
    • Interest on loans & overdrafts
    • Dividends paid to shareholders
    • Repayment of loans
  • Cash is king - it is the lifeblood of the business

  • If a business runs out of cash it will almost definitely fail

  • Few businesses have near unlimited cash, so careful management is required