Cash flow

Closing balance = Opening balance + Net cash flow

The movement of money into and out of a business over a period of time.

Net CF = Inflows − Outflows. Closing = Opening + Net CF. Cash flow ≠ Profit.

Without cash, can't pay suppliers, employees or costs — even if profitable on paper.

Profit = accounting measure (revenue minus costs). Cash flow = actual money moving in/out of the bank.

Net = $12k − $14k = −$2k. Closing = $5k + (−$2k) = $3,000

Builder completes $50k project (profit) but customer pays 3 months later — no cash for workers.

Running out of cash — more fail from this than from being unprofitable.

Profit = revenue minus costs; cash flow = actual timing of money entering/leaving the bank.

Net cash flow = Total inflows − Total outflows

Business receives a large loan (cash in) but costs exceed revenue — has cash, making a loss.

Cash sales, credit sales received, loans, investments, interest received.

Suppliers, employees, daily operating costs (rent, utilities, insurance).

Opening balance — carries forward automatically.

Cash flow problems — running out of cash even if profitable.

Opening balance + Net cash flow

Rent, wages, stock purchases, loan repayments, utilities.

Business has run out of cash — needs additional finance to pay bills.

Depreciation is a non-cash accounting entry — no money actually leaves the bank.

To maintain relationships and supply chains — late payment can mean no more deliveries.

One of the most frequently asked exam questions. Need a clear answer with an example.

Opening balance (start), net cash flow (in minus out), closing balance (end).

Timing — when money actually enters/leaves the bank, not when transactions are recorded.

Total inflows − Total outflows

Yes — if it runs out of cash to pay bills. Profit ≠ cash.

A prediction of expected cash inflows and outflows over a future period — usually 12 months, month by month.

1) Cash inflows, 2) Cash outflows, 3) Net cash flow + Opening/Closing balances.

Net = −$1k. Closing = $3k + (−$1k) = $2,000. Negative net but opening covers it.

Based on predictions not facts, unexpected costs arise, external shocks unpredictable.

Inflows → Outflows → Net cash flow → Opening balance → Closing balance

Potential cash crisis — business will run out of money and needs urgent action.

Overly optimistic assumptions make it look good, but reality may be much worse.

Closing balance — negative means the business will run out of cash that month.

Change ONLY affected figures, recalculate net cash flow and closing balance. Don't touch unaffected figures.

To anticipate cash shortages and plan ahead — arrange finance before problems hit.

Complete missing figures, amend for changes, interpret results.

Total inflows − Total outflows for that month.

Plan — smart businesses update regularly as new information comes in.

Increase March inflows by 10%, recalculate March net CF and closing. Leave other months alone.

Identify low-cash months, and support loan applications/investor pitches.

Opening balance + Net cash flow

Opening balance + Net cash flow

Not necessarily — a large opening balance can cover it. Check the CLOSING balance.

Recessions, pandemics, new competitors make all predictions wrong.

Weather forecast — prepare for bad conditions before they happen.

Show the bank you've planned ahead and can predict repayment — reduces their risk.

Complete missing figures, amend for changes, interpret what results mean.

Previous month's closing balance — carries forward automatically.

12 months, broken down month by month.

Realistic assumptions, regular updates, scenario planning for best/worst cases.

Growing too fast without enough cash to support expansion — sales grow but cash can't keep up.

Economic downturn, seasonal demand, late payments, competition, supplier price rises, interest rate rises.

Negative net CF several months, declining closing balance, negative closing balance, large one-off outflows, inflows below target.

Overtrading — growing too fast without enough cash.

Overtrading, poor credit control, too much stock, over-investment, poor planning, high overheads.

Identify PROBLEM → Explain CAUSE → Suggest SOLUTION = full marks.

One = possible blip. Three in a row = trend needing action.

Sales fluctuate — a ski resort has 6 months low inflows but pays rent all year.

Customers take too long to pay — cash is tied up in receivables while bills still need paying.

Stock — cash locked in unsold inventory.

Loan repayments become more expensive, increasing outflows with no matching increase in inflows.

Cash reserves eroding month by month — heading toward crisis.

Competition — rivals taking market share.

Business has literally run out of cash — can't pay bills without extra finance.

Competitors take market share, reducing sales and cash inflows.

Over-invested in expensive fit-out plus generous credit terms to clients — cash locked up despite being busy.

Cash tied up in unsold inventory — can't pay bills until stock sells.

Internal = within business's control (decisions). External = outside control (economy, rivals).

Patterns — are problems one-off or recurring over multiple months?

Internal (controllable) and external (uncontrollable) — shows analytical depth.

Tighten credit control (shorter terms) or use factoring for immediate cash.

Immediate cash but factor keeps a percentage — receive less than full invoice value.

1) Increase inflows, 2) Reduce outflows, 3) Obtain additional finance.

Longer supplier terms, reduce stock (JIT), cut costs, lease not buy, delay non-essential spending.

Overdraft, short-term loan, sell assets, owner's capital injection, sale and leaseback.

Reduce credit terms, offer early payment discounts, chase debts, factoring, increase sales.

Sell an asset (e.g. warehouse) for cash, then lease it back to keep using it. Cash up, rent ongoing.

Selling unpaid invoices to a factor for immediate but reduced cash — instant money, lose a percentage.

Slow down growth, arrange longer-term finance to match expansion pace.

2-3 strategies, explain HOW each works, link to cause, evaluate pros/cons.

Spreads cost over time in smaller payments — preserves cash instead of one big outflow.

Raises cash but reduces capacity to generate future revenue.

Short-term temporary cash gaps — flexible but expensive due to high interest.

Factoring — sell invoices for immediate cash.

Offer e.g. 2% off if paid within 7 days instead of 30 — encourages faster customer payment.

Saves cash now but may lose customers — lower future inflows.

Clearance sale + switch to JIT ordering to reduce tied-up cash.

Damages relationships, loses early payment discounts — saves now, costs more later.

Sale and leaseback — large cash injection but ongoing monthly expense.

Order less stock, more frequently — reduces cash tied up while meeting demand.

Lease instead of buy — spreads costs over time.

Getting what you're already owed sooner — timing, not total revenue.

Evaluate BOTH the short-term cash benefit AND potential long-term consequences.

Overdraft to cover gap, or build reserves during peak months.

Trade-offs — short-term gains may have long-term costs.

Generic solutions score lower — showing WHY it fixes the specific cause = deeper understanding.

Delays outflows — keep cash longer before paying, improving short-term liquidity.

Flexible for short-term but high interest — expensive if used long-term.

Customers pay sooner — cash arrives earlier, less tied up in receivables.

Owner puts personal money in — increases cash without debt or selling assets.