Northern IrelandBusiness StudiesSyllabus dot point

How does a business predict its cash, and why can a profitable firm still run out of money?

Cash flow forecasting: the meaning of cash flow, completing and interpreting a cash flow forecast including net cash flow and the opening and closing balances, and the difference between cash and profit.

A CCEA GCSE Business Studies guide to cash flow forecasting. Covers what cash flow means, how to complete and interpret a cash flow forecast including net cash flow and the opening and closing balances, the difference between cash and profit, and how a business solves a cash-flow problem.

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Quick answer

Cash flow is the money flowing into a business (receipts) and out of it (payments), and a cash flow forecast predicts these month by month so shortages can be spotted early. Net cash flow equals total receipts minus total payments; the closing balance equals the opening balance plus net cash flow, and each month's closing balance becomes the next month's opening balance, with a negative closing balance meaning the business is overdrawn. Crucially, cash is not the same as profit: a business can be profitable yet run out of cash if it has sold on credit but customers have not paid while bills are due now, which is why profitable firms can still fail. A cash-flow problem can be solved by increasing cash in (chasing customers, an overdraft, selling assets) or reducing cash out (trade credit, cutting spending, leasing). The exam skill is to calculate net cash flow and closing balances accurately and explain the cash-versus-profit distinction.

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What this dot point is asking
What cash flow means
Completing a cash flow forecast
Worked example: completing a forecast
Cash is not the same as profit
Solving a cash-flow problem
Why this matters
Try this

What this dot point is asking

You need to explain what cash flow means, complete and interpret a cash flow forecast including net cash flow and the opening and closing balances, understand the crucial difference between cash and profit, and suggest how a business solves a cash-flow problem. CCEA examiners reward accurate calculation with method shown, correct interpretation of the figures, and the cash-versus-profit distinction. Cash flow matters because a business that runs out of cash cannot pay its bills and may be forced to close, even if it is making a profit.

What cash flow means

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

Completing a cash flow forecast

A forecast is set out month by month, and you must be able to work out the missing figures.

Worked example: completing a forecast

A common exam task is to fill in the missing figures in a forecast.

Complete two months of a cash flow forecast

A business starts January with an opening balance of $\pounds 1{,}000$ . In January, receipts are $\pounds 6{,}000$ and payments are $\pounds 5{,}500$ . In February, receipts are $\pounds 5{,}000$ and payments are $\pounds 6{,}200$ . Complete the net cash flow and closing balance for each month.

step 1 January net cash flow

$\text{Net cash flow} = 6{,}000 - 5{,}500 = \pounds 500$ . Cash in is greater than cash out, so January has a net inflow.

step 2 January closing balance

$\text{Closing balance} = \text{opening} + \text{net} = 1{,}000 + 500 = \pounds 1{,}500$ . This becomes February's opening balance.

step 3 February net cash flow

$\text{Net cash flow} = 5{,}000 - 6{,}200 = -\pounds 1{,}200$ . Cash out is greater than cash in, so February has a net outflow.

step 4 February closing balance and interpretation

$\text{Closing balance} = 1{,}500 + (-1{,}200) = \pounds 300$ . The balance is still positive, so the business stays in the black, but it has fallen sharply, warning that another bad month could push it overdrawn.

Cash is not the same as profit

This is one of the most tested ideas in the whole course.

Solving a cash-flow problem

If a forecast shows a negative balance, the business can act on either side of the flow. To increase cash in, it can chase customers to pay sooner, ask for cash on delivery, arrange an overdraft or short-term loan, or sell unused assets. To reduce cash out, it can use trade credit to pay suppliers later, cut or delay spending, hold less stock, or lease rather than buy equipment. The right action depends on the cause of the shortage.

Why this matters

Cash flow links to sources of finance (overdrafts and trade credit manage cash gaps), to business success and failure (poor cash flow is a top cause of failure), and to the firm's wider financial health. Forecasting lets a business see trouble coming and arrange finance in good time. In the exam, the most valuable skills are calculating net cash flow and closing balances accurately with method shown, and explaining clearly why cash and profit are different.

Try this

Q1. Write the formula for net cash flow. [1 mark]

Cue. Net cash flow = total receipts minus total payments.

Q2. An opening balance is £200 and the net cash flow for the month is minus £350. Calculate the closing balance. [2 marks]

Cue. Closing balance = 200 + (minus 350) = minus £150 (an overdraft).

Q3. Explain why a profitable business can still run out of cash. [2 marks]

Cue. Profit counts a credit sale straight away, but if customers have not yet paid, no cash has arrived while the firm must still pay its own bills now.

Exam-style practice questions

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

CCEA Unit 2 (style)4 marksA business has an opening balance of £500. In March its receipts are £4,000 and its payments are £4,800. Calculate the net cash flow and the closing balance for March.

Show worked answer →

A calculation question testing AO2. Show the working clearly.

Net cash flow = receipts minus payments = £4,000 minus £4,800 = minus £800 (a net cash outflow).

Closing balance = opening balance plus net cash flow = £500 plus minus £800 = minus £300.

The closing balance is minus £300, an overdraft. Marks are for the correct net cash flow and the correct closing balance, with method shown. A negative closing balance signals a cash-flow problem the business must solve.

CCEA Unit 2 (style)6 marksA profitable business has a negative closing balance. Discuss how it could improve its cash flow.

Show worked answer →

An extended question testing AO2 and AO3. Suggest ways, then judge.

Increase cash in: chase customers to pay sooner or ask for cash on delivery, arrange an overdraft or short-term loan, or sell off unused assets.

Reduce cash out: delay payments to suppliers using trade credit, cut or delay spending, reduce stock held, or lease rather than buy equipment.

Judgement: argue the best solution depends on the cause; if customers pay late, tighten credit terms, but if costs are too high, cut spending. A quick fix such as an overdraft buys time, but the underlying cause must be tackled. A supported judgement reaches the top band.

Related dot points

Sources & how we know this

CCEA GCSE Business Studies specification — CCEA (2017)
CCEA GCSE Business Studies microsite — CCEA (2017)