Cash-flow forecasting and working capital — common mistakes

In exam questions, be careful to distinguish between sales revenue and cash received from sales. If a business makes credit sales, the cash inflow will be delayed and should be recorded in the month the payment is actually received from the debtor, not the month the sale was made.

When asked to complete a cash flow forecast, always show your workings for Total Inflows, Total Outflows, and Net Cash Flow. Even if your final closing balance is incorrect, you can gain marks for correct calculations of the intermediate steps. Pay close attention to the opening balance provided.

When credit sales are given, cash inflow month = sale month + credit period (e.g. sold January, 30 days credit → cash in February).

Not necessarily. Profit and cash are different. A business records a profit when a sale is made, but it may not receive the cash until weeks or months later if the sale was on credit. A profitable business can easily run out of cash (become insolvent) if it fails to manage its debtors and working capital effectively. This is why cash flow forecasting is critical even for profitable firms.

Depreciation is a non-cash expense. It is an accounting concept used to spread the cost of a fixed asset over its useful life and is included in the Income Statement to calculate profit. However, no physical cash leaves the business when depreciation is recorded. A cash flow forecast only tracks actual movements of cash, so depreciation is excluded.

No, it is a forecast, not a statement of fact. Its accuracy depends on the quality of the data and assumptions used. Sales forecasts may be overly optimistic, or unexpected costs can arise (e.g., machine breakdown). While it may not be perfectly accurate, it remains an invaluable planning tool that forces management to think about the future and allows them to react more quickly to changes.