Part 1: Using Cash-Flow Forecasts
Why Cash Matters to a Business (More Than Profit)
This is the most important concept in this chapter: cash is the "blood" of a business. A profitable business can fail very quickly if it runs out of cash. This is called insolvency.
A real example from the textbook: Joules, a UK lifestyle retailer, announced plans to shut down in December 2022 because of cash-flow problems — even though they made a profit of £2.6 million that year. They had profit but no cash. Why? Because the timing of money in and out didn't match up.
Remember: Profit ≠ Cash. A business can be profitable but insolvent if cash runs out.
Understanding the Cash-Flow Cycle
Every business goes through a cycle of cash moving in and out. Let's break it down:
Pay cash for → Produce → Hold as → Sell to → Receive cash
materials products stock customers from sales
↑_______________|________________|________________|
(this time gap is the problem)
Here's the real challenge: imagine a supplier gives your business trade credit of 60 days. This means:
- Day 0: You receive stock from the supplier. You pay nothing yet.
- Days 1–60: You sell the stock and receive cash.
- Day 60: You pay the supplier.
On day 61, you've made sales and have cash — but by then, you still need to pay other bills (wages, electricity, rent). If you don't have cash from earlier sales, you're in trouble.
Key insight: The gap between paying suppliers and receiving cash from customers is where most cash-flow problems happen. Working capital keeps you alive during this gap.
The Cash-Flow Cycle:
Buy materials (cash out) → Make products → Hold stock → Sell products → Receive cash (cash in)
The longer this cycle, the more working capital you need to survive it.
Constructing a Cash-Flow Forecast
A cash-flow forecast is a table showing predicted cash inflows and outflows for future months (usually 3, 6, or 12 months). You use it to:
- Spot months when cash might run out
- Arrange borrowing before you need it
- Plan when to spend on equipment
- Make better decisions
Typical inflows: sales revenue, loans, investor money, asset sales
Typical outflows: raw materials, wages, utilities, loan repayments, equipment
How to Build a Cash-Flow Forecast
Step 1: Start with an opening balance
January: Opening balance = £500 (cash the owner put in)
Step 2: List all inflows and total them
January inflows = £8,600 (from sales)
Step 3: List all outflows and total them
January outflows = £4,770 (materials, wages, bills)
Step 4: Calculate net cash flow
Step 5: Calculate closing balance