Learn: Interpreting a Cash Flow Forecast to Identify Risk Months

Welcome!You've already learned about cash flow forecasts and why businesses use them. Today, we'll build on that by exploring how to interpret a cash flow forecast to pinpoint risk months for a business.

What is a Risk Month?A risk month is a period when a business is likely to face cash flow problems. This could happen if outflows are higher than inflows, leaving a negative closing balance. Identifying these months helps businesses prepare and avoid financial difficulties.

Signs of a Risk MonthKey signs of a risk month in a cash flow forecast include:Negative net cash flow (outflows exceed inflows).Low or negative closing balances (cash reserves are insufficient).Large payments due, such as loans or supplier costs, without matching inflows.

Steps to Identify Risk MonthsFollow these steps to identify risk months in a forecast:Check net cash flow for each month. Look for months with negative values.Review closing balances. Check for low or negative figures.Identify large outflows, such as loan repayments or stock purchases, and compare them to inflows.

Example ScenarioImagine a business with the following forecast:January: £5,000 inflows, £6,000 outflows, closing balance £-1,000.February: £7,000 inflows, £8,000 outflows, closing balance £-2,000.Both months show negative net cash flow and closing balances. These are risk months.

Review Time!Great work! You've learned how to spot risk months using cash flow forecasts. Let's test your understanding with a few final questions.