3.2.2 - Cash-flow forecasts

Forecast receipts and payments

A forecast puts expected receipts and payments into the periods when the money changes hands. It is a prediction based on assumptions, rather than a record of what has already happened.

Cash inflows include customer receipts, loans received, owners' investment and proceeds from selling assets. Cash outflows include payments for inventory, wages, overheads, equipment and loan repayments. A loan received is an inflow although it is not revenue; depreciation is an accounting cost but not a payment of cash in that month.

Add the components to find each period's totals. In an illustrative July plan for a tea stall, expected sales are 1,200 drinks at INR 60 each: total revenue is INR 72,000. Ingredients cost INR 36,000, wages INR 18,000 and rent/utilities INR 6,000: total operating costs are INR 60,000. If all sales and these costs are paid in July, with no other transactions, July receipts and payments equal those revenue and cost totals. Credit terms would break that equality.

Timing a credit sale

The following illustrative Kenyan furniture workshop forecast is in KES, for January–March. Cash sales are paid in the month sold. All credit sales are paid in full in the next month, with no bad debts assumed. December credit sales of KES 2,000 will be collected in January. All listed purchases, wages, overheads and equipment are paid in the month shown. There are no other receipts or payments in the forecast.

January revenue is KES 6,000 + KES 4,000 = KES 10,000, but January receipts are KES 6,000 + KES 2,000 = KES 8,000. February collects January's KES 4,000 credit sales; March collects February's KES 5,000. March's KES 3,000 credit sales are due in April and are excluded from March inflows. Counting both a credit sale and its later receipt as cash would double-count the same sale.

January outflows are KES 3,500 + KES 3,000 + KES 1,500 + KES 2,000 = KES 10,000. The equipment is included because it must be paid for in January. These cash outflows are not automatically the accounting costs used to calculate profit; inventory timing and depreciation can differ. Always read the table heading and payment assumptions.

Net cash flow

Net cash flow shows how much cash increases or decreases during one period before allowing for the opening balance. Calculate it using the period's total inflows and total outflows.

For the workshop's January forecast, substitute KES 8,000 inflows and KES 10,000 outflows: $8,000 - 10,000 = -2,000$. January net cash flow is negative KES 2,000: the forecast predicts KES 2,000 more paid out than received.

February net cash flow is $12,000 - 9,000 = 3,000$, positive KES 3,000. March is $17,000 - 10,500 = 6,500$, positive KES 6,500. Preserve the sign. A negative result is not a calculation error and does not mean that inflows themselves are negative.

A negative flow reduces the available balance; a positive flow increases it. It does not tell you the amount available at the end of the month until you also know the opening balance. Nor does it establish profit: the forecast includes payment timing and transactions such as equipment purchases.