Key Idea: A business can make a profit and still run out of cash, because money does not arrive when the sale is made. This topic is how to forecast cash, why it runs short, and what to do about it.
Profit is not cash
- A sale on credit is profit now, cash later.
- Buying an oven takes cash now but is not taken off this year's profit in one go.
- Loans in, repayments and dividends out move cash but not profit.
The forecast
- Opening balance + cash inflows − cash outflows = closing balance.
- Each month's closing balance is next month's opening balance.
- A negative closing balance is a warning to act before it happens.
Problems and fixes
- Causes: slow payers, too much stock, growing too fast, seasons, one-off bills.
- Fixes: bring cash in sooner, send it out later or less, find short-term finance.
- Every fix has a cost: a discount, a supplier's goodwill, interest.
The words to know
| Word | Means | Do not confuse with |
|---|---|---|
| Cash flow | money moving into and out of a business over a period | profit, which is revenue minus costs |
| Cash flow forecast | a month-by-month estimate of cash coming in and going out | a budget, which sets targets for revenue and costs |
| Net cash flow | cash inflows − cash outflows for the month | the closing balance |
| Closing balance | opening balance + net cash flow | the total cash inflows |
| Overtrading | growing faster than the cash available to pay for the growth | trading at a loss |
| Credit control | managing how much credit customers get and chasing them to pay | trade credit, which the business receives from suppliers |
Complete a forecast line by line: totals, net cash flow, closing balance, then carry it to next month's opening balance. Negative figures go in brackets. For a strategy, name it, show it working on the case's figures, and give its cost to the business.
Exam-style question
Lena's Bakery Ltd's cash flow forecast for January–March 2026 shows an opening balance of $25,000 in January. Total cash inflows are $118,000, $114,000 and $125,000, and total cash outflows are $126,000, $126,000 and $148,000. Calculate the closing balance for March (show all your working).
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Important: A $6,000 hotel order invoiced at the end of April is April profit but May cash. A $45,000 oven is cash out now, not a $45,000 cut in profit. Ask of every event: does money move this month?
Tap each card to check yourself.
Why is March's balance negative in Lena's forecast? Two extra bills land together: Valley Grain's $12,000 Easter flour order and $10,000 van insurance.
Name two causes of cash flow problems. Any two: customers paying late, too much stock, overtrading, seasonal demand, an unexpected bill.
One way to bring cash in sooner? Chase the cafés and hotels to pay within their 30 days, or offer a small discount for paying early.
One way to send cash out later? Ask Valley Grain for 45 days instead of 30 on the Easter order.
Why can a profitable business become insolvent? Profit can be tied up in debtors, stock or new assets while the bills still have to be paid in cash.
One cost of using the overdraft to cover March? Interest is charged, and the bank can reduce or withdraw the overdraft.
Exam tips
- Profit counts the sale; cash counts the payment. Keep the two apart.
- In a forecast, each closing balance becomes the next opening balance.
- Negative balances go in brackets; show every step.
- Match the fix to the cause the case shows.
- Every fix costs something: say what, for this business.