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Revenue, Costs, Profits and Cash

Cash flow, cash-flow forecasting and business survival

  • 3 things to know
  • Papers 1 and 3

Overview

Cash flow against profit, how a profitable firm runs out of cash, liquidity and working capital, growing and seasonal firms, improving cash flow without more sales, depreciation, cash-flow forecasts, net cash flow and closing balances and calculating them, negative balances, credit sales timing, and identifying credit needs.

What you need to know

Answer each one before you reveal it.

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Key term

Define cash flow.

Key term

What is the difference between profit and cash flow?

Key term

How can a profitable firm run out of cash?

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    Define cash flow.

    Model answer

    Cash flow is the movement of money into and out of a business over a period of time.

  2. 2

    What is the difference between profit and cash flow?

    Model answer

    Profit is revenue minus costs over a period whether or not the money has yet been received or paid, while cash flow records only the money that actually moves in and out.

  3. 3

    How can a profitable firm run out of cash?

    Model answer

    If customers take long credit while suppliers and wages must be paid at once, the money leaves before it arrives, so the firm cannot settle its bills despite trading profitably.

  4. 4

    Define liquidity.

    Model answer

    Liquidity is a firm's ability to meet its short-term obligations, which depends on holding enough cash or assets that can quickly be turned into cash.

  5. 5

    Define working capital.

    Model answer

    Working capital is the money available to fund day-to-day operations, calculated as current assets minus current liabilities.

  6. 6

    Why does a rapidly growing firm often run into cash-flow difficulty?

    Model answer

    Growth requires stock, staff and equipment to be paid for before the extra sales are collected, so cash drains out faster than it comes in, a problem known as overtrading.

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