To interpret a cash-flow forecast, read down the closing balance, find the first month that falls short, give its figure and suggest one response that matches the cause. The forecast is a warning, not just a table.
This lesson is part of business finance. It builds on the purpose and duration match in connecting finance choice with purpose and duration.
How do the rows connect?
Each month has four lines. The closing balance of one month becomes the opening balance of the next.
- Opening balance: cash at the start of the month.
- Receipts: money coming in.
- Payments: money going out.
- Net cash: receipts minus payments.
- Closing balance: opening balance plus net cash.
Worked example: an invented forecast
Kedai Kain Laila has this forecast. All figures are in RM.
| Item | Jan | Feb | Mar |
|---|---|---|---|
| Opening balance | 2 000 | 3 500 | 1 500 |
| Receipts | 9 000 | 6 000 | 7 000 |
| Payments | 7 500 | 8 000 | 9 500 |
| Net cash | 1 500 | −2 000 | −2 500 |
| Closing balance | 3 500 | 1 500 | −1 000 |
Check January: 2 000 + 1 500 = 3 500. February: 3 500 − 2 000 = 1 500. March: 1 500 − 2 500 = −1 000.
Interpretation: the closing balance falls each month, from RM3 500 to RM1 500 and then to −RM1 000. In March, the shop expects to be RM1 000 short, because payments of RM9 500 exceed receipts of RM7 000.
A response that fits the cause: arrange a short-term overdraft of RM1 000, or ask suppliers to delay RM1 000 of payments until April.
The mistake of mixing cash and profit
The common slip is to say the shop is losing money because the balance is negative. The forecast shows cash timing, not profit.
Laila’s shop might still earn a yearly profit, but March payments arrive before sales do. The repair is to say “a cash shortfall of RM1 000 in March” and to suggest short-term help, not to claim the business is failing.
Check yourself
April’s forecast shows receipts of RM10 000 and payments of RM7 000. With the March closing balance of −RM1 000, what is April’s closing balance? What does it show?
Answer
Net cash = 10 000 − 7 000 = 3 000. Closing balance = −1 000 + 3 000 = RM2 000.
The shortfall in March is temporary, because April’s receipts recover the balance. A short-term source suits this need better than long-term finance.
What to study next
Finally, use the numbers to weigh two options and judge which is better. Continue with evaluating financing trade-offs in a fictional case.
The cash, profit and transaction timeline shows why cash and profit move at different times. For a teacher to check how you read a table, see online one-to-one Business tuition.