The opening balance at the start of the year will be a true reflection of the business’s bank balance, whereas the closing balance will be based upon the predicted incomes and expenditures over the period of the cash flow forecast, normally a year. One of the key purposes of the cash flow forecast is to highlight, in advance any months where there is a risk of a negative cash flow, as this allows the business to make arrangements – for example, a prearranged overdraft with the bank – or to try to take actions to avoid this.
A business
with a negative closing balance is often said to have liquidity problems
and is in danger of becoming insolvent.
Using the hyperlinked
- cash
flow forecast - look in more detail at methods available to try to avoid
these negative closing balances:
Activity: E.1.2:
Why might a
new business experience cash flow problems in the first few months of trading?
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