Some businesses fail despite being profitable. This happens because profit and cash flow are not the same thing.
Profit is an accounting measure — revenue less costs over a period. A business might show £100,000 profit on paper but have negative cash flow.
Cash flow is the actual money moving in and out of the bank. A business might make £100,000 profit but still have no cash in the bank, because of timing mismatches.
For example, if a business sells goods on 60-day credit terms, cash doesn't arrive for two months — but wages are still due weekly, so cash flow can be negative even while the business is profitable. Some successful, rapidly-growing businesses face cash flow problems for exactly this reason, since they must invest heavily in stock and equipment before the revenue from growth is actually collected.
Cash Flow Forecasting
A cash flow forecast predicts the money coming into and going out of a business over a future period, usually month by month, helping managers plan ahead and avoid running out of cash.
Identifying shortfalls: forecasts highlight months where cash outflows are expected to exceed inflows, giving the business time to arrange finance or adjust spending.
Supporting decisions: managers can decide when to invest, hire, or launch new products based on expected cash availability.
Securing finance: banks and investors often require a cash flow forecast before agreeing to lend or invest.
A cash flow forecast typically shows cash inflows (e.g. sales revenue, loans), cash outflows (e.g. wages, rent, materials), and the net cash flow and closing balance for each period.
The Cash Flow Forecast Formula
Net cash flow (NCF) = Cash inflow − Cash outflow, for that month.
Opening balance = the cash expected in the bank at the start of the month. The key trick: the closing balance of one month becomes the opening balance of the next month.
Closing balance = Opening balance + Net cash flow.
For example, if a month's opening balance is £5,000, cash inflows are £53,000 and cash outflows are £46,500: NCF = £53,000 − £46,500 = £6,500, so Closing balance = £5,000 + £6,500 = £11,500 — which then becomes next month's opening balance. If a closing balance goes negative, the business faces a cash flow crisis: it cannot pay bills that are due. Spotting this in advance, via the forecast, gives time to arrange an overdraft or delay a payment before it becomes a crisis.
Benefits and Limitations of Cash Flow Forecasts
Benefits: identifying periods of cash surplus or shortage in advance; helping prevent liquidity problems and insolvency by flagging falling or negative balances early; improving decision-making about investments, hiring or expansion; and providing evidence for banks and investors assessing whether a business can repay a loan.
Limitations: forecasts are based on estimates, so they may turn out to be inaccurate; sales and demand can change due to seasonality, competitors or the wider economy; costs (wages, energy, materials) can rise unexpectedly; customers may pay late or suppliers may demand earlier payment than planned; and forecasts can become outdated, needing regular review as actual figures become known.
Payables vs Receivables
Managing payables and receivables carefully is essential for healthy cash flow — a business can be profitable on paper but still run out of cash if the timing of payments isn't managed well.
Payables (trade creditors): money the business owes to suppliers. Delaying payment keeps cash in the business for longer, but can damage supplier relationships.
Receivables (trade debtors): money owed to the business by customers. The longer customers take to pay, the greater the pressure on cash flow.
If a business has to pay its suppliers before it receives payment from its own customers, this creates a "cash flow gap" that has to be actively managed — poor management of payables and receivables is one of the most common causes of business failure, even among profitable businesses.
Real-World Case Studies
Late payment — the biggest cash flow challenge for UK SMEs
Industry research suggests that 82% of UK small and medium-sized businesses have faced cash flow difficulties, with late payment from customers being the single biggest cause — 62.6% of invoices sent by UK SMEs between September 2024 and August 2025 were paid late. This shows just how central the "receivables" side of cash flow management is in practice: even a healthy, profitable order book can create serious cash flow pressure if customers simply don't pay on time.
Source: verified via search, September 2026 — cash flow management research covering UK SMEs, September 2024-August 2025.
Wilko — a well-known retailer that ran out of cash
Wilko, a UK retail chain trading for decades, collapsed into administration in August 2023, putting around 12,000 jobs at risk. Its CEO was direct about the reason: "Given the cash position, we've been left with no choice but to take this unfortunate action." In the months before collapse, Wilko had deferred payments to suppliers and asked landlords to move to monthly rents to manage its cash position — but credit insurers pulled cover, meaning many suppliers began demanding payment upfront, which then hurt product availability in stores and made the situation worse. Wilko owed £410.9 million to landlords, suppliers, HMRC and others when it collapsed.
Source: verified via search, September 2026 — Retail Gazette, AccountingWEB and Original 106 Aberdeen coverage of Wilko's 2023 administration.
Quick Quiz
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1. A month's opening balance is £2,000, inflows are £18,000, and outflows are £15,500. What is the closing balance?
2. What becomes next month's opening balance?
3. Money the business owes to its suppliers is called...
4. Why can a profitable business still run out of cash?
5. Why might a bank ask to see a cash flow forecast before approving a loan?
Score: 0 / 0
Fill in the Blank
Tap the word or phrase that correctly completes each formula.
1. Net cash flow = Cash inflow − ____.
2. Closing balance = Opening balance + ____.
3. Money owed to the business by its own customers is called ____.
Score: 0 / 0
Quick Knowledge Check
Short, snappy recall questions — tap to reveal the answer.
What is the net cash flow formula? (1 mark)
Cash inflow − Cash outflow.
What is the closing balance formula? (1 mark)
Opening balance + Net cash flow.
What are payables? (1 mark)
Money the business owes to its suppliers.
What are receivables? (1 mark)
Money owed to the business by its customers.
Key Term Flashcards
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Cash flow forecast
A prediction of the money coming into and going out of a business over a future period, usually month by month.
Net cash flow
Cash inflow minus cash outflow for a given period.
Payables
Money the business owes to its suppliers — also called trade creditors.
Receivables
Money owed to the business by its customers — also called trade debtors.
Cash flow gap
The gap created when a business must pay its suppliers before it receives payment from its own customers.
A*/A Stretch
Examiner's eye
Never confuse "profit" and "cash" in an exam answer — examiners specifically reward answers that explain the timing difference between the two (e.g. recording a credit sale vs actually receiving the cash), rather than treating them as interchangeable.
Synoptic link
Connecting to sources of finance (L2, this unit): Several sources of finance exist specifically to manage the cash flow gap between payables and receivables — an overdraft, for example, is often used exactly to bridge a short-term shortfall a cash flow forecast has identified in advance.
Try This With AI
Before using this: AI tools can get facts or mark scheme details wrong, and quality varies by tool. Always check anything factual against your notes or ask your teacher.
Give me three months of opening balance, inflow and outflow figures for a fictional business, one month at a time, hiding the closing balance until I answer. After each one, mark whether I calculated the net cash flow and closing balance correctly, and check I carried the right closing balance into the next month's opening balance.