Cash Flow Basics

Why cash is king

Cash is the money a business has available right now to spend. It matters because a firm must pay its wages, its suppliers and its bills on time, and all of those need cash in the bank today. Cash flow is the money moving into and out of a business. When cash flow is positive a firm can pay on time, invest and survive a slow month. When it runs short the firm cannot pay its debts when they are due, and it may become insolvent and fail. Here is the trap that catches many students: cash is not the same as profit. Profit is what is left after costs over a period, but a profitable business can still run out of cash if its customers have not yet paid. This module covers why cash matters and how it differs from profit.

Cash flow words

Learn these before you match anything, and hold on to the idea that cash and profit are not the same.

Cash against profit

These two are easy to confuse, so it helps to set them side by side. A business can have one without the other.

How to tell cash from profit

Whenever a question mixes the two, ask one thing: is the money actually in the bank now, or only earned on paper. Cash is what you can spend today to pay a wage or a supplier. Profit is a wider score kept over weeks or months, and much of it may be sitting in invoices customers have not paid yet. The point that wins marks is that a firm can be profitable and still be unable to pay its bills. Judge each figure by whether it is real, spendable money right now.

Match the term to its meaning

Cash or profit problem?

A firm has made a healthy profit this year, but this week it cannot pay its staff because customers have not yet paid their bills. What best describes its situation?

• It has a cash flow problem despite being profitable.
• It must be making a loss.
• There is nothing wrong at all.
• It has too much cash.

Why cash matters

Select the TWO true statements about cash.

• Cash is needed to pay wages and suppliers on time
• A profitable firm can still fail if it runs out of cash
• Cash and profit are exactly the same thing
• A profitable firm can never run short of cash

Cash actually received

A firm sells goods worth 5000 pounds, but 3000 pounds of that is on credit and has not been paid yet. Subtract to find how much cash the firm has actually received, in pounds.

Order a cash flow crisis

Put the stages of a cash flow crisis in order, earliest first.

• Customers pay their bills late
• The firm runs low on cash
• It cannot pay its suppliers and wages
• It may become insolvent and fail

Complete the facts

The money a business has available to spend right now is _____. The money moving into and out of a business is its cash _____. What is left after costs are taken from income over a period is _____. A firm that cannot pay its debts when they are due is _____.

Match the situation to what it shows

Spot the true cash flow facts

Tap the TWO statements that are true about cash flow.

• Cash is money a business can spend right now
• A profitable firm can still run out of cash and fail
• Cash and profit always mean the same thing
• A firm with profit is always safe from cash problems

Cash or profit?

Read each case and choose the best response, with a reason.

• A shop is profitable over the year but keeps struggling to find the cash to pay its monthly rent. What does this show?
• Why does a business need cash rather than just profit on paper?
• A student writes that a profitable firm can never have money troubles. How should this be corrected?

Explain why cash matters

A profitable small firm keeps struggling to pay its bills on time. Explain why cash is so important and how cash differs from profit.

• Explain what cash and cash flow mean
• Explain why a business needs cash to pay wages, suppliers and bills
• Explain the difference between cash and profit
• Explain how a profitable firm can still run out of cash
• Finish with a judgement on why cash flow can matter more than profit in the short term