IGCSE Business: Cash flow forecast (Cambridge 0264)

This guide covers section 5.2 (Cash flow forecast) of the Cambridge IGCSE Business 0264 syllabus for examination in 2027, 2028 and 2029. Both papers are based on all the subject content, so cash flow can appear in short answers, data responses or the case study. The syllabus notes that you will not be assessed on constructing a cash flow forecast. You are expected to amend or complete a simple one, and to interpret it.

Go on to the revision notes and the practice questions when you are ready. Related reading: business finance, the course hub, the printable checklist and the free diagnostics.

What this topic covers

Syllabus point (5.2.1)	What you must be able to do
Why cash is important	Explain what a business needs cash for and what happens without it
What a cash flow forecast is and why it matters	Define it and give reasons businesses prepare one
Main features	Identify cash inflow, cash outflow, net cash flow, opening balance, closing balance
Amend or complete	Fill gaps in a simple forecast and change it when information changes
Interpret	Read a forecast and say what it shows about the business
Short-term cash flow problems	Explain overdraft, delaying supplier payments, asking customers to pay more quickly, delaying the purchase of non-current assets

Why cash is important

Cash is the money a business can spend straight away: notes and coins and the balance in its bank account. Every business needs it to pay wages, suppliers, rent, utility bills and loan repayments when they fall due. Employees and suppliers will not accept a promise to pay later as a replacement for the money itself.

A business can be making a profit and still run out of cash. Suppose it sells goods on credit this month. The sale counts in its trading results, but the money may arrive weeks later. If bills fall due first, it cannot pay them. A business that cannot pay its debts as they fall due may be forced to close. This is why managers watch cash as well as profit. Profit is covered separately, in section 5.3 of the syllabus.

What a cash flow forecast is

A cash flow forecast is an estimate of the money expected to come into and go out of a business over a future period, usually month by month. It shows the expected cash balance at the end of each month.

Why it is important:

• It shows in advance when cash will run short, so the owner can arrange an overdraft or change plans before the problem arrives.
• It shows when there will be spare cash that could be used or saved.
• Banks and other lenders often ask to see one before agreeing to lend, because it shows whether the business can repay.
• It helps managers plan spending, such as when to buy stock or equipment.
• It lets managers compare the forecast with what actually happens and ask why the two differ.

Its weakness is that it is only an estimate. Sales may be lower than hoped, customers may pay late, or costs may rise, and the forecast will then be wrong.

Main features

Feature	Meaning
Cash inflow	Money coming in during the month, for example cash received from customers, a loan received, or the sale of an old machine
Cash outflow	Money going out during the month, for example payments for materials, wages, rent, loan repayments, a new machine
Net cash flow	Cash inflow minus cash outflow for the month. It can be negative
Opening balance	Cash held at the start of the month
Closing balance	Cash held at the end of the month

Two relationships hold the whole forecast together:

• Net cash flow = total cash inflow - total cash outflow
• Closing balance = opening balance + net cash flow

The closing balance of one month is the opening balance of the next month. Remember that only cash actually moving counts. A credit sale appears in the month the customer pays, not the month the goods are sold. Negative figures are shown with a minus sign or in brackets. A negative closing balance means the business expects to be short of cash, which in practice means it would be overdrawn.

Completing a forecast

You will be given a table with some figures missing. Work along each month in the same order: total the inflows, total the outflows, find the net cash flow, then the closing balance, then carry it forward.

Worked example 1: Moorgate Print Works

Moorgate Print Works starts March with 3,000 in the bank. All figures below are in dollars.

Item	March	April	May	June
Receipts from customers	18,000	20,000	16,000	22,000
Sale of old equipment	0	0	2,500	0
Materials	7,000	8,000	6,500	8,500
Wages	6,000	6,000	6,000	6,500
Rent	2,000	2,000	2,000	2,000
Other costs	1,500	1,800	1,400	2,000
Loan repayment	1,000	1,000	1,000	1,000
New printing press	0	12,000	0	0

Step 1: total inflows are 18,000, 20,000, 18,500 (16,000 + 2,500) and 22,000.

Step 2: total outflows are 17,500, 30,800, 16,900 and 20,000.

Step 3: net cash flow is +500, -10,800, +1,600 and +2,000.

Step 4: closing balances are 3,500, -7,300, -5,700 and -3,700. Each is the opening balance plus the net cash flow, and each becomes the next month’s opening balance.

	March	April	May	June
Opening balance	3,000	3,500	-7,300	-5,700
Total inflow	18,000	20,000	18,500	22,000
Total outflow	17,500	30,800	16,900	20,000
Net cash flow	500	-10,800	1,600	2,000
Closing balance	3,500	-7,300	-5,700	-3,700

Interpretation: the business is short of cash from April to June, and the cause is the press. Without it, the closing balances would be 3,500, 4,700, 6,300 and 8,300. Day-to-day trading generates cash every month. The problem comes from one large payment.

Worked example 2: finding missing values

Sunvale Bakery has a forecast with gaps (letters mark them).

Month	Opening	Inflow	Outflow	Net	Closing
January	2,000	7,500	8,300	A	B
February	C	8,200	7,100	1,100	2,300
March	2,300	6,800	D	-1,100	E
April	F	9,000	7,700	G	H

• A = 7,500 - 8,300 = -800
• B = 2,000 + (-800) = 1,200
• C is the January closing balance, so 1,200. Check: 1,200 + 1,100 = 2,300, which matches
• D: net = inflow - outflow, so outflow = inflow - net = 6,800 + 1,100 = 7,900
• E = 2,300 + (-1,100) = 1,200
• F = 1,200
• G = 9,000 - 7,700 = 1,300
• H = 1,200 + 1,300 = 2,500

Working backwards from a given closing balance or net figure is a common way to be tested. Use the two relationships above and check each answer against the neighbouring cells.

Amending a forecast

Forecasts change when information changes. To amend one, move or alter only the affected figures, then recalculate every balance from that month onwards. Balances before the change stay the same.

Worked example 3: Eldridge Cycle Hire

Eldridge Cycle Hire opens June with 6,000. Its original forecast:

	June	July	August	September
Opening balance	6,000	4,000	7,500	11,500
Cash inflow	9,000	14,000	16,000	7,000
Cash outflow	11,000	10,500	12,000	9,500
Net cash flow	-2,000	3,500	4,000	-2,500
Closing balance	4,000	7,500	11,500	9,000

A tour company that owes 4,000 for July hires says it will pay in August instead. July inflow becomes 10,000 and August inflow becomes 20,000. The new July net is -500 and the closing balance is 3,500. August opens at 3,500, has a net of +8,000 and closes at 11,500. September is unchanged.

Notice what happened. The July balance was lower, but August onwards returned to the original figure because the money still arrived within the forecast period. A late payment changes timing. It does not change the total unless the customer never pays.

Interpreting a forecast

Do not simply read numbers out. Say what they mean, using the figures. Ask these questions:

• Is any closing balance negative? Which months? That is when a shortage is expected.
• Is the balance rising or falling over the whole period?
• Is a large one-off item, such as equipment, the cause of a problem, or is the business short in ordinary months?
• Is a month with a negative net cash flow still safe because the opening balance was high enough? Eldridge has negative net cash flow in June and September but never has a negative closing balance.
• How reliable are the estimates? A forecast built on hopeful sales figures deserves caution.

A good interpretation sentence uses a figure and a consequence: “Moorgate is expected to be overdrawn by 7,300 at the end of April, so it cannot pay its bills from its own cash unless it arranges finance.”

Solving a short-term cash flow problem

The syllabus lists four ways to overcome a short-term cash flow problem. They deal with a temporary shortage. They do not fix a business whose costs are always higher than its income.

Method	How it helps	Drawbacks
Overdraft	The bank allows the account to go below zero up to an agreed limit, so bills can be paid at once	Interest is charged on the amount borrowed, and the bank can withdraw or reduce the facility
Delaying supplier payments	Cash stays in the business for longer	Suppliers may refuse credit in future, add charges, or lose trust; a prompt-payment discount may be lost
Asking customers to pay more quickly	Cash arrives earlier	Customers may be annoyed or buy elsewhere; offering a discount for early payment reduces income
Delaying the purchase of non-current assets	Large payments are moved to a month when cash is available	Output may be held back, old machines may break down, and growth may be delayed

Choosing a remedy

Return to Moorgate. If it delays the 12,000 press from April to June, its closing balances become 3,500, 4,700, 6,300 and -3,700. April and May are now safe. The shortage is moved to June, not removed. Delay therefore needs support, such as an overdraft limit that covers 3,700, or faster customer payments in May and June.

When asked to recommend or justify a remedy, match it to the cause and the size of the gap. A one-off large payment suggests delaying it or borrowing. Slow-paying customers suggest chasing them. A recommendation needs a reason and, for evaluation, a comparison with another option and a judgement about the circumstances.

Common errors

• Forgetting to carry the closing balance forward as the next opening balance.
• Subtracting in the wrong direction, so net cash flow has the wrong sign.
• Treating a sale on credit as cash received in the month of sale.
• Calling the forecast profit. It shows cash, not profit.
• Saying delaying a payment “saves money”. It only moves when the cash leaves.
• Listing methods without linking one to the business in the question.

Frequently asked questions

What is a cash flow forecast? A cash flow forecast is an estimate of the money expected to come into and go out of a business over future months. It shows in advance when cash may run short, so the owner can act.

Why can a profitable business run out of cash? A business may sell goods on credit and record the sale, but the customer may not pay for weeks while wages and suppliers must be paid now. Profit and cash are different measures.

Why do banks ask to see a cash flow forecast? Banks and other lenders often ask to see a forecast before agreeing to lend, because it shows whether the business can repay.

What is the main limitation of a cash flow forecast? It is only an estimate. Sales may be lower than hoped, customers may pay late and costs may rise, so the actual figures can differ from the forecast.

Official syllabus

Cambridge IGCSE Business 0264 syllabus for examination in 2027, 2028 and 2029, published by Cambridge University Press & Assessment (Cambridge International Education), section 5.2.