Cash flow Forecasting

• Why cash matters: it's the most liquid asset and pays for day-to-day survival — wages, bills, supplier invoices.
• Cash vs profit: two completely different things. You can be profitable on paper and still go bust from lack of cash.
• Cash inflows and outflows: money coming in (sales, loans, capital) vs money going out (rent, wages, stock).
• Net cash flow: inflows minus outflows for a period.
• Building a cash flow forecast: a four-step process — total inflows, total outflows, net cash flow, then opening/closing balances.
• Interpreting a forecast: spotting cash shortfalls (negative closing balances) and cash surpluses.
• Solving cash flow problems: six practical strategies, each with a trade-off.

Think of cash as the blood in a business's body. A business can look perfectly healthy on the outside — great sales, growing brand, loyal customers — but if the "blood" (cash) stops flowing, everything shuts down fast. That's why cash is called the business's "lifeblood." Without it, a business becomes insolvent (unable to pay what it owes) surprisingly quickly, even if things otherwise look fine.

Cash is the most liquid form of current asset — meaning it's already money, or as close to money as possible (notes, coins, and money sitting in the bank). Compare that to something like stock (inventory), which is also a current asset but needs to be sold before it becomes cash. That's a key distinction: liquidity is about how quickly and easily something can be turned into spendable cash.

What cash actually gets used for

• Regular operating expenses — wages, supplier invoices, rent, utility bills. The predictable, everyday costs of running the business.
• Unexpected expenses — a machine breaks down, a pipe bursts, a court fine turns up. Cash is the emergency fund.

The trade credit cycle

New businesses often have zero track record, so suppliers won't trust them yet — they demand cash on purchase for everything. Once a relationship builds and trust is established, suppliers extend trade credit, typically 30 or 60 days to pay. The cycle looks like this:

This is the concept students mix up most often, so let's be really precise about it.

sale on credit