IB Business Management – 3.7 Cash flow forecasting

Focus: cash inflows, outflows, forecasts & interpretation

Welcome to 3.7 Cash flow forecasting

This workbook follows the IB BM syllabus and Surridge & Gillespie to help you understand, build and interpret cash flow forecasts.

SL + HL Finance & accounts

Why cash flow forecasting matters

A profitable business can still run out of cash. Cash flow forecasts help managers see in advance when cash inflows might be too low (or outflows too high) to pay wages, suppliers or the bank.

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Exam link. In IB BM you may need to classify inflows and outflows, complete a cash flow forecast and recommend solutions to cash flow problems.

How to use this mini-course

  1. Use Cash flow 101 to get clear on key terms and the basic structure of a forecast.
  2. Read Using forecasts to see common causes and solutions to cash flow problems.
  3. Complete the three build forecasts practices – they get closer to exam-style data-response.
  4. Answer the interpretation questions for AO2–AO3 practice.
  5. Use the Flashcard studio to secure the vocabulary.
  6. Finish with the 20-question quiz and review the explanations.
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Tip. Always draw a quick cash flow table with columns for opening balance → net cash flow → closing balance. It reduces errors and shows the pattern across months.

Cash flow 101 – key ideas & structure

Inflows, outflows, net cash flow and the link between opening and closing balances.

Core Definitions

Key definitions

Cash flow – the movement of money into and out of a business over a period of time.
Cash inflow – money coming into the business (e.g. cash sales, bank loans, capital injected by owners).
Cash outflow – money going out of the business (e.g. wages, rent, repayment of loans, purchase of equipment).
Net cash flow = total cash inflows − total cash outflows.
Opening balance – the cash balance at the start of the period.
Closing balance – the cash balance at the end of the period.

How the balances link together

Net cash flow
net cash flow = cash inflows − cash outflows
Closing balance
closing balance = opening balance + net cash flow
Next month’s opening
next opening balance = this month’s closing balance

Cash flow forecast

A cash flow forecast is a table showing estimated cash inflows and outflows for each month, together with the net cash flow and expected opening/closing balances.

  • Helps managers predict cash shortages.
  • Makes it easier to plan for overdrafts or loans if needed.
  • Highlights where cash outflows could be reduced or inflows increased.
Remember: cash flow is about the timing of cash. Profitability and cash flow are related but not the same.

Quick check – inflows, outflows and balances

1. Which of the following is a cash inflow?

2. Net cash flow is calculated as:

3. The closing balance for a month is:

Using cash flow forecasts – problems & solutions

Why do cash flow problems happen and what can managers do about them?

Analysis AO2–AO3

Causes of cash flow problems

  • Too much stock – cash is tied up in inventories rather than in the bank.
  • Too generous credit terms – customers take a long time to pay.
  • Over-investment in fixed assets – buying expensive equipment at once.
  • Overtrading – expanding sales too quickly without enough working capital.

Common solutions

  • Increase cash inflows – e.g. chase debtors, ask customers to pay sooner, promote cash sales.
  • Reduce or delay cash outflows – e.g. negotiate longer credit terms with suppliers, cut unnecessary expenses.
  • Arrange short-term finance – e.g. bank overdraft, short-term loan.
Overdraft – a flexible short-term bank loan allowing a business to overdraw its account up to an agreed limit.

Quick check – reading stories from forecasts

1. A forecast shows strong positive net cash flow for most months but one large negative net cash flow in August. What is the most sensible response?

2. A firm has rising profits but worsening cash flow. Which is the most likely explanation?

Practice – build and complete cash flow forecasts

First classify each item as an inflow or outflow, then complete the forecast. These mirror exam-style data sets.

Practice 3 data sets

How to answer

Enter your answers in whole dollars only (no $ sign or commas). Use a minus sign for negative net cash flows or overdraft closing balances.

Scenario – Lakeside Café

The following information applies from July to December:

  • Rent per month: $1 000
  • Government payment toward rent per month: $500
  • Salary per month: $1 200
  • Electricity: $200, payable every second month starting in August
  • Cleaning supplies per month: $100
  • Sales revenue per month: July $4 000, August $4 000, September $3 500, October $3 500, November $4 000, December $4 500
  • Purchases per month: 40% of sales revenue.

Step 1 – classify the items

1. Government payment toward rent

2. Purchases of food and drink (40% of sales)

3. Salary and electricity payments

Step 2 – complete the cash flow forecast (July–December)

Only the July opening balance is given. You must calculate opening balances for later months.

Category July August September October November December
Opening balance $0
Cash sales revenue 4000 4000 3500 3500 4000 4500
Government payment toward rent 500 500 500 500 500 500
Total cash inflows 4500 4500 4000 4000 4500 5000
Rent 1000 1000 1000 1000 1000 1000
Purchases (40% of sales)
Salary 1200 1200 1200 1200 1200 1200
Electricity 0 0 0
Cleaning supplies 100 100 100 100 100 100
Total cash outflows
Net cash flow
Closing balance

Check that each month’s closing balance equals the next month’s opening balance.

Scenario – CityCycle Hire

CityCycle hires out bicycles to tourists from April to June. Cash inflows come from:

  • Cash sales to tourists
  • Membership fees paid monthly
  • A small sponsorship payment from the local council

Cash outflows include wages to staff, rent of the storage unit and maintenance of the bikes.

Step 1 – classify the items

1. Sponsorship payment from the council

2. Wages and bike maintenance costs

Step 2 – complete the cash flow forecast (April–June)

Only April’s opening balance is given. Use the totals to find net cash flow and the later opening and closing balances.

Category April May June
Opening balance 2000
Total cash inflows 9000 7500 8000
Total cash outflows 8000 7800 8200
Net cash flow
Closing balance

Notice how one negative month of net cash flow does not mean the business is failing.

Scenario – AppLaunch Start-up

A small software business is launching a new app. The founders have some savings, but early months are cash-tight. Cash inflows come from investor capital and early customer subscriptions. Cash outflows include development wages, marketing and rent.

Step 1 – classify the items

1. Capital invested by the founders

2. Purchase of new computer equipment

Step 2 – complete the cash flow forecast (January–March)

The forecast allows the cash balance to become negative (overdraft). Only January’s opening balance is given.

Category January February March
Opening balance 1000
Total cash inflows 3500 4000 4800
Total cash outflows 4700 3600 4200
Net cash flow
Closing balance

Many start-ups use overdrafts or investor capital to survive months of negative net cash flow.

Practice – interpreting cash flow forecasts

Use your understanding of 3.7 to choose the best interpretation in each case.

AO2–AO3 MC practice

Multiple-choice interpretation questions

1. Lakeside Café has a negative net cash flow in February but a positive closing balance at the end of the month. What does this mean?

2. PixelPrint’s forecast shows a falling closing balance in June. Which action would most directly improve its cash flow?

3. MountainGear has negative net cash flow in October but positive net cash flow in November and December. What is the most sensible conclusion?

4. A cash flow forecast shows large positive net cash flow in most months and a rising closing balance. Which stakeholder is most likely to be reassured by this information?

5. A business regularly has a positive net cash flow, but its closing balance is falling each month. Which is the most likely explanation?

Flashcard studio – 3.7 key terms

Flip through the language of cash flow forecasting.

Recall Vocabulary

Deck

Click a term in the list to jump straight to that card.

End-of-topic quiz – 3.7 cash flow forecasting (20 Qs)

Questions move from basic definitions through calculations to interpretation and evaluation.

Quiz 20 questions