Cash and Cash-Flow

Cash is king

A business can be making a profit on paper and still fail, simply because it has no cash in the bank to pay its bills this month. Cash keeps a business alive from day to day. This module shows why cash matters, how it differs from profit, and how a cash-flow forecast predicts the money coming in and going out.

The language of cash flow

Four ideas run through this module:

Cash is not the same as profit

Profit is revenue minus costs over a period. Cash is the actual money in the bank right now. They differ because a sale can be recorded as profit before the cash is received, for example when a customer buys on credit and pays later. So a profitable business can still run short of cash and be unable to pay suppliers or wages, which risks insolvency.

Work out the net cash flow

In one month a business has total cash inflows of 5000 pounds and total cash outflows of 4000 pounds. Using net cash flow = inflows - outflows, what is the net cash flow, in pounds?

Cash versus profit

Both matter, but they answer different questions about a business.

What is the problem?

A business is making a profit this year, yet this month it cannot pay its suppliers. What is the most likely problem?

• It has run short of cash
• It must be making a loss
• It has sold too many products
• It has paid too little tax

Work out the closing balance

A month starts with an opening balance of 3000 pounds. During the month inflows are 4000 pounds and outflows are 6000 pounds. Using closing balance = opening balance + net cash flow, what is the closing balance, in pounds?

Build a cash-flow forecast

Put the steps for working out one month of a cash-flow forecast into the right order.

• Add up all the cash inflows for the month
• Add up all the cash outflows for the month
• Work out net cash flow as inflows minus outflows
• Add the net cash flow to the opening balance to get the closing balance
• Carry the closing balance forward as next month's opening balance

Inflow, outflow, balance

Cash flow in words

Money coming into a business is a cash _____; money going out is a cash _____. The _____ cash flow is inflows minus outflows. The _____ balance is the opening balance plus the net cash flow, and it becomes next month's _____ balance.

Spot the cash inflows

Select the TWO items that are cash INFLOWS for a business.

• Cash received from selling products to customers
• A bank loan paid into the business account
• Paying wages to employees
• Buying raw materials from a supplier

Cash flow against profit

Tap the TWO statements that are TRUE.

• Net cash flow is total inflows minus total outflows.
• A profitable business can still run out of cash.
• Cash and profit always mean exactly the same thing.
• The closing balance is always larger than the opening balance.
• Paying a supplier increases the cash in the bank.

The cash-shortage showdown

A small business is watching its cash carefully. Work through three decisions.

• This month inflows are 4000 pounds and outflows are 6000 pounds. What is the net cash flow?
• The business needs to cover a short-term cash gap of a few weeks. Which source of finance fits best?
• What would most improve the business's cash flow?

Why profit is not enough

Explain the difference between cash and profit, and why a business that is making a profit can still run out of cash. Use the idea of a cash-flow forecast in your answer.

• Define cash flow (inflows and outflows) and profit (revenue minus costs)
• Explain that a profit can be recorded before the cash is actually received, for example on credit sales
• Explain how a cash-flow forecast shows net cash flow and the closing balance each month
• Explain one consequence of running out of cash, such as being unable to pay suppliers or wages