Cash flow: forecasting and managing problems

Cash flow is the movement of money into and out of a business. Profitable businesses can still go bust if they run out of cash. AQA expects you to be able to construct a simple cash-flow forecast and discuss management strategies.

Why cash flow matters

• Pay wages on time.
• Pay suppliers to keep goods coming.
• Pay bills (rent, utilities, tax).
• Avoid bankruptcy — most start-ups fail from cash-flow problems, not lack of profit.
• Plan for growth — big orders need cash to fulfil before payment arrives.

Cash vs profit — a critical distinction

A business can be profitable (revenue > expenses) but cash-poor (no money in the bank). Why?

• Customers paying late — sale recognised but cash not yet received.
• Stock building up — money tied up in inventory.
• Large equipment purchase — paid out as cash, profit unaffected over time.
• Loan repayments — capital repaid is cash out, not an expense.

Profit measures performance; cash measures liquidity.

The cash-flow forecast

A month-by-month projection of cash in and cash out. Common format:

Month	Jan	Feb	Mar
Opening balance	5 000	3 000	1 500
Cash in	12 000	14 000	18 000
Cash out	14 000	15 500	17 000
Net cash flow	(2 000)	(1 500)	1 000
Closing balance	3 000	1 500	2 500

Closing balance = Opening balance + Cash in − Cash out.

Cash inflows

• Sales (cash and credit collected).
• Loans received.
• Asset sales.
• Investor cash.
• Grants.

Cash outflows

• Purchases of stock / raw materials.
• Wages and salaries.
• Rent / utilities.
• Loan repayments.
• Taxes (VAT, PAYE, Corporation).
• Equipment purchases.
• Marketing.

Why forecasts matter

• Spot tight months — arrange overdraft or delay spending in advance.
• Plan for growth — see if you can afford new staff or stock.
• Convince banks/investors — required for any loan application.
• Test scenarios — what if sales fall 20 %?
• Track performance — compare actuals to forecast each month.

Common cash-flow problems

1. Late-paying customers

B2B customers often pay 30–90 days after invoice. Big customers may pay even later.

2. Seasonal demand

Ice cream shops booming in summer, struggling in winter. Need cash reserve from peak season.

3. Holding too much stock

Cash tied up; risk of obsolescence.

4. Over-investment

Buying too much equipment too early — drains cash before revenue catches up.

5. Overtrading

Growing faster than the cash available. Often kills successful start-ups — too many orders, not enough cash to fulfil them.

6. Unexpected costs

Equipment breakdown, legal claim, supplier price hike.

Solutions to cash-flow problems

Improve inflows

• Chase customers — automated reminders, invoice factoring.
• Tighter credit terms — 7 days instead of 30.
• Discounts for early payment — 2 % off for 7-day pay.
• Deposits / pre-payments — common for custom work.
• Diversify customer base — reduce reliance on one big payer.

Reduce outflows

• Negotiate longer credit with suppliers.
• Lease rather than buy equipment.
• Cut non-essential spending.
• Delay tax payments if HMRC allows (Time to Pay arrangements).

Bridge gaps

• Overdraft — short-term cash buffer.
• Short-term loan — for known, time-limited gaps.
• Invoice factoring / discounting — sell invoices to a finance company; receive 80–90 % of value immediately, full value when customer pays minus a fee.
• Asset finance — borrow against equipment.

Real-world examples

• Carillion 2018 — UK construction giant collapsed despite reporting profits. Late payments, over-leverage, weak cash management.
• Pret A Manger Covid 2020 — strong brand and pre-Covid profitability, but cash collapsed when offices closed; needed emergency funding.
• Boohoo / Asos — fast fashion; rely on tight cash management to fund continuous launches.

Examiner tips

For cash-flow questions, show your working in tables. Identify the month of trouble and recommend specific solutions. Distinguish cash from profit clearly.