Cash & Cash Flow
Cash Keeps a Business Alive
A business can be profitable on paper and still collapse if it runs out of cash. Wages, rent and supplier bills all have to be paid in actual money on the day they fall due — the tax office and the landlord do not accept IOUs. Cash flow is the movement of money into and out of a business over time. If more is going out than coming in for too long, the business becomes insolvent and folds.
This is why the single biggest trap in GCSE Business is assuming profit and cash are the same thing. A sale generates profit the moment it is made, but the cash may not arrive for 30, 60 or 90 days if the customer is on trade credit. Meanwhile the business still has to pay wages every Friday.
Profit is not the same as cash. A profitable business can still fail if cash is not available to pay wages, rent and suppliers on the day they are due. Profit measures the whole trading year; cash is about day-by-day timing.
Why Cash Provides Liquidity
Liquidity means having enough cash ready to meet short-term debts and expenses — the VAT bill, the supplier invoice due on Friday, the wages on the 28th. A liquid business has cash on hand or money coming in that can be used immediately. An illiquid business may be wealthy on paper (lots of stock, lots of customers owing money) but still unable to pay a £500 bill today.
This is why most sensible managers keep a cash reserve — a cushion large enough to cover a couple of months of outflows. It prevents one late payment from becoming a crisis.
Reading a Cash-Flow Forecast
A cash-flow forecast is a table that predicts cash in and cash out, month by month. OCR expects you to interpret one and to complete missing cells — you will not have to build one from scratch. The four key rows are:
Cash inflows — money coming in from sales, loans, new investment or asset sales.
Cash outflows — money going out on wages, rent, stock, utilities, loan repayments.
Net cash flow — inflows minus outflows for that month. It can be positive or negative.
$$\text{Net cash flow} = \text{Total inflows} - \text{Total outflows}$$
Opening and closing balances — the opening balance is how much cash the business had at the start of the month. The closing balance is opening balance + net cash flow, and it becomes next month’s opening balance.
Worked Example — Completing a Forecast
A Cornish surf shop’s forecast shows some cells filled in and others blank. January opening balance is £8,000. January inflows are £12,000 and outflows are £15,000. February inflows are forecast at £10,000 and outflows at £11,000. Complete the missing cells.
Step 1 — January net cash flow:
$$\pounds12{,}000 - \pounds15{,}000 = -\pounds3{,}000$$
Step 2 — January closing balance:
$$\pounds8{,}000 + (-\pounds3{,}000) = \pounds5{,}000$$
Step 3 — February opening balance is January’s closing balance: £5,000. February net cash flow: £10,000 − £11,000 = −£1,000. February closing balance: £5,000 + (−£1,000) = £4,000. The shop ends February with £4,000 — still positive, but the trend is downwards. If March repeats the same shortfall the balance will drop to £3,000 and the shop will need action.
Closing balance = Opening balance + Net cash flow. Net cash flow = Cash inflows − Cash outflows. The closing balance of one month becomes the opening balance of the next.
Why Cash-Flow Forecasting Is Useful
A forecast is a planning tool. It anticipates periods of cash shortage before they hit, so the owner has time to arrange remedies — negotiate longer supplier credit, arrange an overdraft, chase unpaid invoices. It also provides targets: if the forecast shows January inflows of £12,000 the owner knows to hit that or act fast. Dunelm, the UK homeware retailer, faces a predictable seasonal pattern in demand across the year. Forecasting lets it plan stock purchases and supplier payments so cash stays positive year-round.
Causes and Fixes for Cash-Flow Problems
Problems come from a handful of common causes: overspending on stock or equipment, slow-paying customers, seasonal sales dips, or growing too fast so outflows race ahead of inflows. When a forecast shows a shortfall, a manager has four main levers.
Re-scheduling payments — negotiate longer trade credit with suppliers or delay non-urgent bills. Low cost, but can damage supplier relationships if overused.
Arrange an overdraft — a short-term bank facility for a dip. Quick and flexible, but interest is high and the bank can withdraw the facility at short notice.
Reduce cash outflow — cut non-essential spending, renegotiate rent, switch to cheaper suppliers, hold less stock. Takes time to bite but has no borrowing cost.
Increase cash inflow — chase unpaid invoices, offer discounts for early payment, run a promotion. The right fix for overdue debtors, but promotions can squeeze profit margins.
The right fix depends on the problem. A one-off dip — a major customer paying two weeks late — is what overdrafts are designed for. A structural problem — outflows consistently higher than inflows — cannot be fixed by borrowing, because the debt just grows. That needs cost cutting, price changes or new revenue streams.