IB Docs (2) Team
Cash flow forecasts
Cash flow forecasts (AO2, AO4)
Cash flow refers to the movement of money in and out of an organization. Cash flow forecasting is a quantitative technique used by business managers to predict how cash is likely to flow into and out of the organization for a particular period of time, such as for the next twelve months.
Cash flow forecasting is a management tool used to monitor an organization’s cash flows in order to avoid liquidity problems. Knowing in advance when the business is likely to face a period of cash shortages (or a liquidity problem) can help it to plan accordingly so that it can continue to operate.
Cash inflows are simply the money going into a business from earnings and other sources of finance. Examples of cash inflows include:
Bank loans
Bank overdrafts
Business angels
- Capital injections from the owners of the business
Cash injection from sponsor
Cash used by customers to pay for the sale of goods and services*
- Interest received on savings in a business bank account
Crowdfunding sources
Government grants and/or subsidies
Payments made to the business from its debtors
- Tax refunds from the government*
* Note: for external assessment purposes, only "cash sales revenue" and "tax refunds" will appear as cash inflows in the prescribed format of the cash flow forecast.
Cash outflows are simply the money going out of a business to pay for its spending. Examples of cash outflows include payments for:
Advertising costs
Cost of sales*
Delivery charges*
Financial perks (benefits)
Heating and lighting costs*
Insurance premiums
Packaging costs*
Purchasing of stock (inventory)
Rent of buildings and premises*
Staff wages and salaries*
Telecommunications, including Internet charges
Utility bills, e.g. gas, water, electricity, and telephone
* Note: for external assessment purposes, the following items appear as cash outflows in the prescribed format of the cash flow forecast: rent, packaging, salaries and wages, cost of sales, heating and lighting, as well as delivery.
Net cash flow (NCF) is the numerical difference between an organization’s total cash inflows and its total cash outflows, per time period.
Net Cash Flow = Cash inflows – Cash outflows
A positive net cash flow exists if the total cash inflows are greater than the total cash outflows for a given period of time, such as a month or per quarter. A negative net cash flow exists if the total outflows exceed the total inflows for particular time period.
A liquidity problem occurs when there is a lack of cash in the organization because its cash inflow is less than its cash outflow, i.e. it experiences negative net cash flow.
Being able to predict cash flow helps a business with its financial management and decision-making.
Constructing cash flow forecasts
The IB prescribed format for constructing cash flow forecasts is shown below. This format applies to both for-profit and non-profit business entities.
Note that negative entries/figures are shown in bracket.
Cash flow forecast for (Business X), for the first three months of 20XX
All figures in $'000 | Jan | Feb | Mar |
Opening balance | 10 | 20 | 15 |
Cash inflows | |||
Cash sales revenue | 200 | 180 | 190 |
Tax refund | 10 | ||
Total cash inflows | 200 | 190 | 190 |
Cash outflows | |||
Rent | 20 | 20 | 20 |
Packaging | 5 | 5 | 5 |
Salaries and wages | 30 | 30 | 30 |
Cost of sales | 100 | 110 | 105 |
Heating and lighting | 20 | 15 | 10 |
Delivery | 15 | 15 | 15 |
Total cash outflows | 190 | 195 | 185 |
Net cash flow | 10 | (5) | 5 |
Closing balance | 20 | 15 | 20 |
Source: Adapted from IB Business Management Guide, page 63
The IB will only use this prescribed format for assessment purposes, as shown in Figure 10 on page 63 of the official guide. Please note that students will not get a copy of this format in the external exams, so it is important to spend time with students to understand and learn the format required to construct and present cash flow forecasts.
To calculate cash flows for each time period, the following items are needed:
Opening balance
Net cash flow
Closing balance
The opening balance in a cash flow forecast refers to the value of cash held by a business at the start of a trading period (usually the beginning of the month).
Net cash flow is the numerical difference between an organization’s total cash inflows and its total cash outflows, per time period.
The closing balance in a cash flow forecast refers to the value of cash held by a business at the end of a trading period (usually the final day of the month), which therefore becomes the opening balance for the next time period.
Closing balance = Opening balance + Net cash flow
Cash flow forecasting formulae
Net cash flow = Total cash inflow – Total cash outflow
Closing balance = Opening balance + Net cash flow
Opening balance = Closing balance in previous month
Note: these formulae are not provided for students in the final examinations.
ATL Activity - Thinking and Communication skills
Cash Flow Hexagons
Give students large yellow hexagons with the various components of the IB's prescribed format for cash flow forecasts. These are given out in a mixed order. Students work in teams to get each component in the correct order, using the hexagons to construct a complete cash flow forecast.
Teacher only boxTeachers can download the cash flow hexagons by clicking the icon below. The components appear in the correct order in the PDF document.
I would suggest getting these printed and laminated so they can be reused. They also make for good classroom displays.
Top tip!
Remember that a cash flow forecast (CFF) is different from a cash flow statement (CFS).
A CFF is a prediction of the cash flows in and out of a business over the foreseeable future. The CFS shows the actual cash inflows and outflows for a specified time period.
To test your understanding of this topic, have a go at these exam practice questions. It is important to practice your quantitative techniques, such as cash flow forecasts, for the Paper 2 examination in particular.
Exam Practice Question 1
Explain two reasons why a new bakery business is likely to face liquidity problems in its first few months of its operation. [4 marks]
Teacher only boxAnswer
Possible reasons include a combination of why cash outflows for the bakery business are likely to exceed cash inflows:
A lack of marketing exposure to create sufficient sales revenue at the bakery
Inability to attract customers away from well-established supermarkets that provide bakery products
High set-up costs which will take several months (at least) to recover once the bakery is operational
Ongoing expenses (such as salaries and rent) may initially exceed cash inflows from new customers.
Mark as a 2 + 2
For each reason, award [1 mark] for a valid point, and [1 mark] for a clear explanation of this reason.
Exam Practice Question 2
The chief accountant of 360 Computers has compiled the following financial data:
Opening balance = $50,000
Total cash outflows = $120,000, and
Total cash inflows = $110,000.
Calculate the closing balance for 360 Computers. [2 marks]
Teacher only boxAnswer
Net cash flow = $110,000 minus $120,000 = ($10,000)
Closing balance = $50,000 + ($10,000) = $40,000
Award [1 mark] for showing the working out.
Award [1 mark] for the correct answer, i.e. $40,000.
Exam Practice Question 3
Ortega Football Academy’s cash flow forecast shows a closing balance of $80,000 at the end of this month. Carlos, the finance director, then discovers that debtors of $12,000 have yet to be included and there is an outstanding invoice of $18,000 that needs to be paid.
Calculate the closing balance for Ortega Football Academy. [2 marks]
Teacher only boxAnswer
Ortega Football Academy’s closing balance = $80,000 + $12,000 – $18,000 = $74,000
Award [1 mark] for showing the working out.
Award [1 mark] for the correct answer, i.e. $74,000.
Exam Practice Question 4
Refer to the figures below for excerpts from Tonina & Co.’s cash flow statement.
Opening balance: $135,500
Cash inflow: $532,500
Cash outflow: $352,500
(a) | Define the term cash flow statement. | [2 marks] |
(b) | Calculate Tonina & Co.’s net cash flow. | [2 marks] |
(c) | Calculate Tonina & Co.’s closing balance. | [2 marks] |
Teacher only boxAnswers
(a) Define the term cash flow statement. [2 marks]
A cash flow statement shows the actual cash inflows and outflows of an organization for a specified time period.
Award [1 mark] for a definition that shows some understanding.
Award [2 marks] for a definition that shows good understanding, similar to the example above.
(b) Calculate Tonina & Co.’s net cash flow. [2 marks]
Net cash flow = Cash inflow – Cash outflow
NCF = $532,500 – $352,500 = $180,000
Award [1 mark] for the correct answer.
Award [1 mark] for showing appropriate working out.
(c) Calculate Tonina & Co.’s closing balance. [2 marks]
Closing balance = Opening balance + Net cash flow
Closing balance = $135,500 + $180,000 = $315,500
Award [1 mark] for the correct answer.
Award [1 mark] for showing appropriate working out.
Exam Practice Question 5
Complete the 3-month cash flow forecast for Mustango Inc. A suitable title is also required. [4 marks]
Dec ($) | Jan ($) | Feb ($) | |
Opening balance | 0 | (780) | 1,720 |
Cash inflows | |||
Cash sales revenue | 8,500 | 7,500 | |
Tax refund | 0 | 4,000 | |
Total cash inflows | 10,500 | 7,500 | |
Cash outflows | |||
Cost of sales | 5100 | 3900 | 4500 |
Salaries and wages | 2000 | 2000 | 2000 |
Rent | 1800 | 1800 | 1800 |
Other costs | 300 | 400 | |
Total cash outflows | 9,280 | 8,000 | |
Net cash flow | (780) | (1,200) | |
Closing balance | 1,720 | 520 |
Teacher only boxAnswer
Cash flow forecast for Mustango Inc.:
Dec ($) | Jan ($) | Feb ($) | |
Opening balance | 0 | (780) | 1,720 |
Cash inflows | |||
Cash sales revenue | 8,500 | 6,500 | 7,500 |
Tax refund | 0 | 4,000 | 0 |
Total cash inflows | 8,500 | 10,500 | 7,500 |
Cash outflows | |||
Cost of sales | 5100 | 3900 | 4500 |
Salaries and wages | 2000 | 2000 | 2000 |
Rent | 1800 | 1800 | 1800 |
Other costs | 380 | 300 | 400 |
Total cash outflows | 9,280 | 8,000 | 8,700 |
Net cash flow | (780) | 2,500 | (1,200) |
Closing balance | (780) | 1,720 | 520 |
Award [1 - 2 marks] for an answer that shows some understanding of cash flow forecasting, although there 3 or more errors. Apply the own figure rule (error carried forward), as appropriate.
Award [3 - 4 marks] for an answer that shows good understanding of cash flow forecasting. For [3 marks], allow up to 1 error. Apply the own figure rule (error carried forward) as appropriate.
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