5.2

Cash flow forecasting

Cambridge IGCSE Business Studies (0450)  · Unit 5: Financial information and decisions  · 9 flashcards

Cash flow forecasting is topic 5.2 in the Cambridge IGCSE Business Studies (0450) syllabus , positioned in Unit 5 — Financial information and decisions , alongside Business finance: needs and sources, Income statements and Statement of financial position.  In one line: Cash flow refers to the movement of money into and out of a business over a period of time. It's crucial for short-term survival and solvency. A positive cash flow means more money is coming in than going out.

This topic is examined in Paper 1 (short-answer questions, built around a pre-released case study) and Paper 2 (extended case-study analysis).

The deck below contains 9 flashcards — 5 definitions and 3 key concepts — covering the precise wording mark schemes reward.  Use the 5 definition cards to lock down command-word answers (define, state), then move on to the concept and application cards to handle explain, describe and compare questions.

Key definition

'cash flow'

Cash flow refers to the movement of money into and out of a business over a period of time. It's crucial for short-term survival and solvency. A positive cash flow means more money is coming in than going out.

Questions this Cash flow forecasting deck will help you answer

Definition Flip

Define 'cash flow'.

Answer Flip

Cash flow refers to the movement of money into and out of a business over a period of time. It's crucial for short-term survival and solvency. A positive cash flow means more money is coming in than going out.

Definition Flip

What is a 'cash flow forecast' and what is its purpose?

Answer Flip

A cash flow forecast is an estimate of all expected cash inflows and outflows for a business over a specific future period. Its purpose is to predict potential cash flow problems and aid in financial planning.

Example: a bakery might forecast monthly cash inflows from bread sales and cash outflows for flour purchases and rent to ensure they can cover their expenses and avoid a cash shortage.
Key Concept Flip

Give examples of typical 'cash inflows' for a business.

Answer Flip

Cash inflows are sources of money coming into the business. Examples include sales revenue, loans received, investments from owners, and grants. A cash flow forecast helps a business plan and manage its finances;

Example: a bakery could forecast increased cash inflows during the holiday season due to increased cake sales.
Key Concept Flip

Give examples of typical 'cash outflows' for a business.

Answer Flip

Cash outflows are payments made by the business. Examples include payments to suppliers, wages, rent, marketing expenses, and loan repayments.

Definition Flip

Explain the difference between 'net cash flow', 'opening balance', and 'closing balance'.

Answer Flip

Net cash flow is the difference between total cash inflows and total cash outflows for a period. Opening balance is the amount of cash a business has at the beginning of the period. Closing balance is the amount of cash at the end of the period; it is the opening balance plus the net cash flow.

Definition Flip

Define 'liquidity' and explain why it is important for a business.

Answer Flip

Liquidity is a business's ability to pay its short-term debts. It's crucial because a lack of liquidity can lead to insolvency and closure.

Example: if a company has $5,000 in immediate debts but only $3,000 in readily available cash, it faces a liquidity problem and may struggle to pay its suppliers on time, damaging its credit rating.
Key Concept Flip

Outline two potential 'cash flow problems' a business might face.

Answer Flip

Two potential cash flow problems are delayed payments from customers and unexpected increases in expenses. These can lead to a shortage of cash to meet immediate obligations.

Example: a bakery might face a cash flow problem if a large order from a hotel is delayed by 30 days, while the cost of flour increases unexpectedly due to a poor wheat harvest.
Definition Flip

What is 'overtrading' and how does it cause cash flow problems?

Answer Flip

Overtrading occurs when a business expands too quickly without sufficient capital. This can lead to cash flow problems because the business invests heavily in assets and inventory but does not generate enough immediate revenue to cover costs.

Example: a rapidly expanding online retailer may take on many new staff and warehouse space before the increased sales revenue is received. A customer delaying payment by 60 days is also an example of overtrading.
Key Concept Flip

Topic: 5.2 Cash flow forecasting. Question: A business has an opening balance of $7,000. Inflows are $15,000 and outflows are $11,000. Calculate the closing balance.

Answer Flip

The net cash flow is $15,000 - $11,000 = $4,000. The closing balance is the opening balance plus the net cash flow, so $7,000 + $4,000 = $11,000. A business might use this calculation to project cash flow during expansion,

Example: opening a new branch with projected inflows of $15,000 and outflows of $11,000 in the first month.

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Take Business Studies Quiz
5.1 Business finance: needs and sources 5.3 Income statements

Key Questions: Cash flow forecasting

Define 'cash flow'.

Cash flow refers to the movement of money into and out of a business over a period of time. It's crucial for short-term survival and solvency. A positive cash flow means more money is coming in than going out.

What is a 'cash flow forecast' and what is its purpose?

A cash flow forecast is an estimate of all expected cash inflows and outflows for a business over a specific future period. Its purpose is to predict potential cash flow problems and aid in financial planning.

Example: a bakery might forecast monthly cash inflows from bread sales and cash outflows for flour purchases and rent to ensure they can cover their expenses and avoid a cash shortage.
Explain the difference between 'net cash flow', 'opening balance', and 'closing balance'.

Net cash flow is the difference between total cash inflows and total cash outflows for a period. Opening balance is the amount of cash a business has at the beginning of the period. Closing balance is the amount of cash at the end of the period; it is the opening balance plus the net cash flow.

Define 'liquidity' and explain why it is important for a business.

Liquidity is a business's ability to pay its short-term debts. It's crucial because a lack of liquidity can lead to insolvency and closure.

Example: if a company has $5,000 in immediate debts but only $3,000 in readily available cash, it faces a liquidity problem and may struggle to pay its suppliers on time, damaging its credit rating.
What is 'overtrading' and how does it cause cash flow problems?

Overtrading occurs when a business expands too quickly without sufficient capital. This can lead to cash flow problems because the business invests heavily in assets and inventory but does not generate enough immediate revenue to cover costs.

Example: a rapidly expanding online retailer may take on many new staff and warehouse space before the increased sales revenue is received. A customer delaying payment by 60 days is also an example of overtrading.

More topics in Unit 5 — Financial information and decisions

Cash flow forecasting sits alongside these Business Studies decks in the same syllabus unit. Each uses the same spaced-repetition system, so progress in one informs the next.

5.1 Business finance: needs and sources

10 flashcards
5.3 Income statements

9 flashcards
5.4 Statement of financial position

9 flashcards
5.5 Analysis of accounts

10 flashcards

Cambridge syllabus keywords to use in your answers

These are the official Cambridge 0450 terms tagged to this section. Mark schemes credit responses that use the exact term — weave them into your answers verbatim rather than paraphrasing.

cash flow cash flow forecast cash inflow cash outflow net cash flow opening balance closing balance liquidity cash flow problems overtrading

Key terms covered in this Cash flow forecasting deck

Every term below is defined in the flashcards above. Use the list as a quick recall test before your exam — if you can't define one of these in your own words, flip back to that card.

'cash flow'
'cash flow forecast' and what is its purpose
Explain the difference between 'net cash flow', 'opening balance', and 'closing balance'
'liquidity' and explain why it is important for a business
'overtrading' and how does it cause cash flow problems

How to study this Cash flow forecasting deck

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