A forecast is an estimate of future figures based on experience. You can make forecasts about all sorts of events e.g. the weather, the likely result of a sports fixture, etc. In business, you can forecast future sales figures or the likely cash flow into and out of a business. A business often prepares a cash flow forecast showing the money likely to flow into and out of its bank account in a given period.
Calculating cash flow
A retailing business typically makes sales of 500 items a month at £5 each. It buys each item that it resells for an average cost of £2.50 each. The running costs of the business are typical £1,000 per month. We can now calculate the cash flow of the business and set it out in a chart. The ‘bottom line’ of each monthly column shows the forecast bank balance at the end of that month.
Forecasts are based on past experience, whereas budgets are based on action plans for the future.