Cash is a fact; profit is a calculation
Cash is money the business can spend now (notes, coins, bank balances). Profit (yearly) is revenue minus total costs. A profitable firm can still run out of cash: debtors delay inflows; stock bought on credit is costed before cash leaves; equipment takes a large cash lump but only a small yearly depreciation charge hits profit; seasonal sales bunch receipts while costs spread evenly. Rule: profit is a calculation; cash is a fact.
Cash-flow forecast layout and formulas
A cash-flow forecast is a forward plan of expected cash, month by month. Rows: cash inflows (sales receipts, loans); cash outflows (purchases, wages, rent); net cash flow; opening balance (= last month's closing balance); closing balance. Formulas: net cash flow = cash inflows − cash outflows; closing balance = opening balance + net cash flow. A negative closing balance means the firm expects to be overdrawn — arrange finance early.
Working capital and cash-flow fixes
Working capital = current assets − current liabilities — net short-term finance for day-to-day running (wages, stock, supplier bills). Current assets (cash, inventory, receivables) become cash within a year; current liabilities (payables, overdraft) fall due within a year. A profitable firm can still fail without enough — insolvency. Fastest fixes for a shortfall: an overdraft, chasing debtors, delaying creditors, or running down surplus inventory.
Drawn from real examiner reports.
Cash-flow answers slip into profit words
The most persistent Section 5 error: answering a cash-flow question in profit terms. Wrong: 'revenue fell, so profit is negative.' Right: 'January cash inflows are below outflows, giving a negative net cash flow and closing balance.' The difference is timing — cash flow is about WHEN money enters and leaves the bank. Use cash words, not profit words.
June 2022 P23 Q4(a); June 2023 P13 Q1(c)-Q1(d); June 2023 P22 Q3(a)
Forecast is a plan, not a past record
A cash-flow forecast is a PREDICTION of future cash — what the firm expects to receive and pay ahead, not a record of what already happened. Its purpose: spot months when cash may run low, arrange finance before the crisis, and plan purchasing around expected cash. Writing that it 'shows the profit made' earns zero — the defining word is forecast.
June 2023 P22 Q3(a)
Two uses of working capital, not two names
Asked for TWO reasons working capital matters, candidates write 'to pay wages' and 'to pay suppliers' — both are the SAME use: funding day-to-day expenses. Examiners credit distinct categories. Genuinely different uses: day-to-day expenses (wages, rent); buying inventory; financing trade receivables; covering unexpected costs. Make the two different purposes, not labels.
June 2023 P11 Q4(c); November 2023 P12 Q1(a)
Explain causes, not just the definition
Asked WHY a business has cash-flow problems, candidates restate the definition (inflows below outflows) instead of naming causes. Causes: customers on credit delay inflows while costs continue; seasonal demand bunches inflows; a one-off outflow (equipment, a tax bill) is unmatched; overtrading; poor credit control. Each needs a mechanism.
June 2023 P11 Q2(a)
Profit does not pay interest or bills
A recurring trap: assuming profit pays loan interest or day-to-day expenses. Interest and running costs are paid from CASH (working capital), not from profit. Profit is the surplus left after all costs — including interest — are deducted; it is not a pot of cash ready to spend. A profitable firm with slow-paying customers can still miss its bills.
November 2022 P13 Q1(d)
Net cash flow ≠ closing balance
Net cash flow is the CHANGE in cash for one month (inflows minus outflows). The closing balance is the TOTAL cash held at month-end (opening balance plus net cash flow) — not the same figure. A positive net cash flow can still leave a negative closing balance if the opening balance was already negative. Always carry the opening balance forward.
Justify needs a supported judgement
On a 6-mark 'Justify' question, the top band needs a supported judgement, not a two-sided list: make a decision, explain WHY in the business's context, and reject the alternative with a reason. A balanced ending with no decision cannot reach the top band.
Chain: cause, mechanism, consequence
Analysis marks come from a chain, not a bare point: name the cause, the mechanism, then the consequence — e.g. customers pay on credit, so inflows are delayed, so suppliers cannot be paid. Signpost with 'this means...', 'as a result...', and stay in cash vocabulary.
Show the formulas and carry the sign
Write the formula, substitute, then state the signed result. Net cash flow = inflows minus outflows; closing balance = opening balance plus net cash flow. A negative closing balance means overdrawn; carry a negative opening balance forward without dropping the minus.
Cash is the money physically available in the business: notes, coins, and bank balances it can use right now.
Profit (for the year) = revenue minus total costs over a period.
A business can be profitable yet run out of cash. For example:
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