Cash is not profit
Cash flow is the movement of money into and out of a business over time, and it is not the same as profit. Cash is money the business can use immediately to pay wages, suppliers and rent as they fall due. Profit is revenue minus total cost over a period. A firm can be profitable yet have no cash now — if customers have not yet paid, or it bought stock in advance. Running out of cash (insolvency) is a common cause of failure, so a forecast warns of shortages early.
The two cash-flow formulae
A cash-flow forecast tracks the cash coming in and going out each period. Cash inflows are money in (cash sales, customer payments, a loan received); cash outflows are money out (suppliers, wages, rent, equipment). Net cash flow = cash inflows minus cash outflows. Closing balance = opening balance plus net cash flow. One month's closing balance becomes the next month's opening balance, carrying the forecast forward.
Interpreting and acting on the forecast
A forecast is useful only if the business acts on it — interpretation means reading the numbers to make a decision, not just filling the table. A negative closing balance signals a shortage; fixes include arranging an overdraft in advance, negotiating longer supplier credit, encouraging customers to pay sooner, or delaying equipment purchases. A large positive balance may be idle cash. Because a forecast rests on estimates, update it as real figures arrive.
Drawn from real examiner reports.
Adding instead of subtracting
Net cash flow is cash inflows MINUS cash outflows, not the two added together. When outflows are larger than inflows the net cash flow is negative — do not drop the minus sign. Confusing the operation, or losing the sign, gives the wrong net cash flow and then feeds a wrong closing balance into the rest of the forecast.
Treating cash flow as profit
Cash flow and profit differ. Profit is revenue minus total cost; net cash flow is cash inflows minus outflows — the money in the bank. A firm can be profitable but short of cash: sell on credit and the profit is booked now while the cash arrives later. "Made a profit so it must have cash" is wrong, and calling net cash flow "profit" mixes them up.
June 2024 Paper 1 Q4(b): candidates who kept cash flow distinct from profit could analyse the importance of cash; those who blurred them struggled to explain why a profitable firm might still fail.
Forgetting to add the opening balance
Closing balance = opening balance plus net cash flow. A frequent error is giving the net cash flow as if it were the closing balance, forgetting the cash the firm started with. And a negative net cash flow does not always mean a negative closing balance — a big enough opening balance can leave the firm in credit, so always add the opening balance back in.
June 2024 Paper 1 Q3(c) and November 2024 Paper 1 Q3(c): closing-balance calculations lost marks when candidates mis-substituted or did not show working.
Not carrying the balance forward
One month's closing balance becomes the next month's opening balance. Starting each month from zero, or forgetting to carry the figure forward, makes every later month of the forecast wrong. Lay the columns out clearly — inflows, outflows, net cash flow, opening balance, closing balance — and carry the closing balance down into the next month.
Not showing working on Calculate parts
Always show your working on the calculate parts. A correct method — the right formula with the right substitution — earns method marks even if the final figure is wrong. Do not just write a bare answer: set out the net cash flow and then the closing balance, so a slip in one number does not cost every mark on the question.
June 2024 Paper 1 Q3(c) and November 2024 Paper 1 Q3(c): a correct method earns method marks even if the final figure is wrong.
Wrong rearrangement for a missing figure
Rearrange the identities carefully when a figure is missing. To find a missing outflow, use cash outflows = cash inflows minus net cash flow; to find an opening balance, use opening balance = closing balance minus net cash flow. Adding instead of subtracting, or rearranging the wrong way round, is a common slip on the harder cash-flow parts.
Net cash flow: define it precisely
Two linked traps. "Net cash flow means cash in and out" is too vague: net cash flow is the difference between inflows and outflows, one figure that can be positive or negative. "A negative net cash flow means the business has failed" is also wrong: one negative month is common, e.g. buying stock before a busy season. Judge the firm by its closing balance.
November 2024 Paper 2 Q3(a): "define net cash flow" was answered too vaguely — "cash in and out" was not enough; examiners wanted the difference between inflows and outflows.
Recall the closing-balance formula
The closing-balance formula is not printed on the paper — unlike the accounting ratios, whose formulae are given — so recall it. Show every step (inflows, outflows, net cash flow, opening and closing balance) so a correct method earns marks even if a figure slips.
Analyse: develop a chain in context
On the 6-mark Analyse, apply the point to the NAMED business and develop cause and effect: a cash shortage means it cannot pay suppliers, so supplies stop, so it cannot trade. Generic points with no application to the firm stay in the lower level, however correct they are.
Justify/Evaluate: give a supported choice
On the 9-mark "Justify" and 12-mark "Evaluate", the AO4 marks come from choosing one option and saying why it outweighs the alternative for this business. A two-sided answer with no decision stays mid-band. Cash-flow hooks: how deep and how temporary the shortage is.
Cash is the money a business can use straight away to pay its bills. Cash flow is the movement of money into and out of the business over time.
A business needs cash to pay suppliers, staff and rent as those bills fall due. Running out of cash (being insolvent) is a common reason businesses fail.
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