A firm has cash inflows of 30,000 and outflows of 26,000 in a month. Calculate its net cash flow. [2 marks]

EnglandBusinessSyllabus dot point

How do businesses manage cash and control spending?

The importance of cash flow and the difference between cash and profit, the construction and interpretation of cash-flow forecasts, the causes of and solutions to cash-flow problems, and the purpose and use of budgets and variance analysis.

A focused answer to the OCR A-Level Business finance theme on cash and budgets, covering the difference between cash and profit, cash-flow forecasts, the causes of and solutions to cash-flow problems, and budgets and variance analysis, with worked calculations.

Generated by Claude Opus 4.811 min answerUpdated 2026-06-02

Reviewed by: AI editorial process; not yet individually human-reviewed

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What this theme is asking
Cash flow versus profit
The cash-flow forecast
Causes of and solutions to cash-flow problems
Budgets and variance analysis
Examples in context
Try this

What this theme is asking

OCR wants you to explain why cash flow matters and how it differs from profit, to construct and read a cash-flow forecast, to diagnose and solve cash-flow problems, and to explain budgets and variance analysis. Cash-flow calculations appear regularly in Components 1 and 2.

Cash flow versus profit

This distinction is crucial: survival depends on cash, not profit. Many profitable firms have failed because they ran out of cash to pay wages or suppliers while waiting for customers to pay.

The cash-flow forecast

A forecast lets a firm spot a future cash shortfall before it happens and arrange finance or change plans in time. Its weakness is that it relies on estimates, so unexpected costs or late payments can throw it off.

Causes of and solutions to cash-flow problems

Common causes: customers paying late, overtrading (growing too fast), holding too much stock, large one-off payments, seasonal sales, or poor forecasting. Solutions fall into four groups:

Speed up inflows. Chase debtors, offer cash discounts for prompt payment, or use debt factoring (selling debts to a finance firm for immediate cash at a fee).
Slow down outflows. Negotiate longer trade credit from suppliers, or delay non-urgent spending.
Cut stock. Release cash tied up in inventory (just-in-time helps).
Arrange finance. Use an overdraft or short-term loan to bridge the gap.

Each has a cost or risk (discounts and factoring fees, supplier goodwill, interest), so the best mix depends on the cause.

Budgets and variance analysis

Budgets help a firm plan, allocate resources, control spending and motivate managers (who are accountable for their budget). Variance analysis then shows where performance differs from plan, so managers can investigate and act. The risk is that budgets can be set unrealistically, can demotivate if imposed, and can encourage spending up to the limit just to protect next year's budget.

Worked example: completing a cash-flow forecast

A firm starts January with $\pounds 5{,}000$ . January inflows are $\pounds 18{,}000$ and outflows $\pounds 21{,}000$ ; February inflows are $\pounds 24{,}000$ and outflows $\pounds 20{,}000$ .

step 1: January net cash flow and closing balance

Net cash flow $= 18{,}000 - 21{,}000 = -\pounds 3{,}000$ . Closing balance $= 5{,}000 + (-3{,}000) = \pounds 2{,}000$ .

step 2: carry the balance forward

February opens with January's closing balance: $\pounds 2{,}000$ .

step 3: February net cash flow and closing balance

Net cash flow $= 24{,}000 - 20{,}000 = +\pounds 4{,}000$ . Closing balance $= 2{,}000 + 4{,}000 = \pounds 6{,}000$ .

step 4: interpret

January was a net outflow that nearly exhausted the firm's cash (down to $\pounds 2{,}000$ ); February recovered it to $\pounds 6{,}000$ . The forecast warns the firm that January is tight, so it should ensure an overdraft facility is available to avoid a crisis if outflows come in higher than expected.

Examples in context

Carillion, a profitable-looking UK construction firm, collapsed in 2018 partly because of cash-flow problems: it was owed huge sums while having to pay subcontractors, and ran out of cash. A seasonal business such as a Christmas-decoration retailer uses a cash-flow forecast to manage the long gap between buying stock in summer and selling it in winter. A start-up uses factoring or an overdraft to bridge the wait for its first customers to pay.

Try this

Q1. A firm has cash inflows of $\pounds 30{,}000$ and outflows of $\pounds 26{,}000$ in a month. Calculate its net cash flow. [2 marks]

Cue. $30{,}000 - 26{,}000 = +\pounds 4{,}000$ .

Q2. Analyse one way a firm could speed up its cash inflows. [6 marks]

Cue. For example, offering cash discounts or using debt factoring brings cash in sooner, at the cost of the discount or fee, developed as a chain in context.

Exam-style practice questions

Practice questions written in the style of OCR exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

OCR H431/01 20216 marksA firm starts a month with

\pounds 5{,}000

cash. It expects cash inflows of

\pounds 18{,}000

and cash outflows of

\pounds 21{,}000

. Calculate the net cash flow and the closing balance, and comment. (6)

Show worked answer →

A Component 1 calculation rewarding the method, working and a comment. Net cash flow $= \text{inflows} - \text{outflows} = 18{,}000 - 21{,}000 = -\pounds 3{,}000$ (a net outflow). Closing balance $= \text{opening balance} + \text{net cash flow} = 5{,}000 + (-3{,}000) = \pounds 2{,}000$ . Comment: the firm still has a positive closing balance, but it spent more cash than it received this month, so if the pattern continues it will run out of cash within two months and should act (chase debtors, delay payments or arrange an overdraft). Markers reward correct net cash flow, closing balance, units, and an interpretation linking the negative net flow to the cash-flow risk.

OCR H431/02 202312 marksAssess the ways a UK business could resolve a short-term cash-flow problem. (12)

Show worked answer →

A 12-mark "Assess" on a four-level grid. Build chains around the main solutions. Speed up inflows: chase debtors, offer cash discounts or use debt factoring, bringing cash in sooner but at a cost (the discount or factor's fee). Slow down outflows: negotiate longer trade credit or delay non-urgent spending, easing the squeeze but risking supplier goodwill. Arrange finance: an overdraft or short-term loan provides immediate cash but adds interest. Cut stock to release tied-up cash. Evaluation: the best mix depends on the cause of the problem and the firm's relationships, for example factoring suits a firm with slow-paying customers, while an overdraft suits a brief, one-off dip. A judged conclusion reaches the top band.

Related dot points

Sources & how we know this

OCR A-Level Business (H431) specification — OCR (2015)