Net cash flow: what one month adds to or takes from the cash held

1. The first formula measures a single month's movement: $net\; cash\; flow=total\; cash\; inflows-total\; cash\; outflows$.
2. A positive net cash flow means more cash arrived than left, so the business ends the month holding more cash than it started with.
3. A negative net cash flow means more cash left than arrived, so the cash held falls by exactly that amount.

Opening and closing balances: how one month feeds the next

1. The second formula turns the movement into a position: $closing\; balance=opening\; balance+net\; cash\; flow$.
2. The third rule carries the forecast along: this month's closing balance becomes next month's opening balance, so a weak month drags down every month that follows it.

A worked forecast: three months for a shop

The forecast below sets out three months for the shop, showing each month's total inflows and outflows, the net cash flow they produce, and the opening and closing balances that follow from it.

1. Read the table down a column to follow one month from its inflows through to its closing balance, and read across a row to follow a single line, such as net cash flow, as it changes over the three months.
2. The closing balance of one month becomes the opening balance of the next, which is why the £400 at the foot of the January column reappears at the top of the February column.

Reading the forecast: what the owner should do about it

1. January's net cash flow is negative, yet the £1,200 opening balance absorbs the £800 gap and the month still ends £400 in credit, so a negative month on its own is not a crisis.
2. February is the month that matters, because a closing balance of −£400 means the shop is forecast to be overdrawn and cannot pay all its bills without help.
3. Because the forecast showed the shortfall weeks in advance, the owner can act in January instead of discovering the problem when a payment bounces.
   1. Arrange an overdraft: agreeing one with the bank before the money is needed is easier than asking once the account is already empty.
   2. Move the timings: chasing customers to pay sooner pulls cash in earlier, and negotiating longer to pay a supplier pushes an outflow later.
   3. Delay spending: putting off buying equipment until March shifts an outflow into the month when £2,500 of cash comes back in.
4. March recovers to a closing balance of £2,100, so the shop has a timing gap rather than a failing business, and short-term finance is the sensible answer rather than closing.
5. A forecast whose closing balance falls every month with no recovery is a different signal, of the kind that ends businesses, as with Wilko, which had traded since 1930 before entering administration in August 2023.