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Cash flow
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A profitable business can still fail if it runs out of cash. Cash-flow forecasts help prevent that.
Why cash matters
Cash pays suppliers, staff and bills. Without it a business cannot operate.
Cash is not the same as profit. A business may make sales on credit and not get paid for weeks.
Cash is not the same as profit. A business may make sales on credit and not get paid for weeks.
The forecast
Net cash flow = cash inflows − cash outflows
Closing balance = opening balance + net cash flow
The closing balance of one month becomes the opening balance of the next.
Closing balance = opening balance + net cash flow
The closing balance of one month becomes the opening balance of the next.
Cash-flow problems
A negative closing balance means the business may need an overdraft or cash from elsewhere.
Solutions: delay payments to suppliers, chase customers to pay sooner, cut costs or arrange short-term finance.
Solutions: delay payments to suppliers, chase customers to pay sooner, cut costs or arrange short-term finance.
Opening balance £500. Inflows £2000. Outflows £2300. Find the closing balance.
- Net cash flow = 2000 − 2300 = −£300
- Closing balance = 500 + (−300)
- = £200
Answer: £200
Net cash flow = inflows − outflows. Closing balance = opening + net cash flow, and it becomes next month's opening balance. Cash is not profit.
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