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WalesBusinessSyllabus dot point

How does a business track the money flowing in and out, and avoid running out of cash?

Cash flow: the meaning and importance of cash flow, the cash flow forecast, cash inflows and outflows, net cash flow and the closing balance, the difference between cash flow and profit, and ways to improve cash flow.

A focused answer to the WJEC GCSE Business content on cash flow, covering the meaning and importance of cash flow, the cash flow forecast, inflows and outflows, net cash flow and closing balance, cash flow versus profit, and how to improve cash flow.

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  1. What this dot point is asking
  2. What cash flow is and why it matters
  3. The cash flow forecast
  4. Cash flow is not profit
  5. Improving cash flow
  6. Why this matters
  7. Try this

What this dot point is asking

WJEC wants you to understand cash flow: what it is and why it matters, the cash flow forecast, cash inflows and outflows, how to work out net cash flow and the closing balance, the crucial difference between cash flow and profit, and ways to improve cash flow. Running out of cash is one of the most common reasons businesses fail, even profitable ones, so this is a vital and heavily examined topic.

What cash flow is and why it matters

The cash flow forecast

The closing balance of one month becomes the opening balance of the next. A forecast that shows a negative closing balance warns the business to act early, for example by arranging an overdraft.

Cash flow is not profit

Improving cash flow

Why this matters

Cash flow links to sources of finance (an overdraft fills a short-term gap), to the supply chain (holding less stock frees cash, and trade credit delays outflows), and to profit (the difference between the two is a favourite exam point). A business that ignores cash flow can fail despite being profitable. Exam questions reward the calculation of net cash flow and closing balance, the cash-versus-profit distinction, and sensible improvements matched to the cause.

Try this

Q1. Inflows are 15,000 and outflows are 17,000. Calculate the net cash flow. [1 mark]

  • Cue. 15,000−17,000=−2,00015{,}000 - 17{,}000 = -2{,}000 (a negative net cash flow).

Q2. Explain one way a business could improve its cash flow. [2 marks]

  • Cue. For example, ask customers to pay sooner (or offer a discount for early payment), so cash comes in faster and the business can pay its own bills on time.

Exam-style practice questions

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

WJEC (Unit 1)3 marksIn a month a business has cash inflows of 18,000 and cash outflows of 21,000, and an opening balance of 5,000. Calculate the net cash flow and the closing balance. Show your working.
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A 3-mark AO2 calculation. Net cash flow is inflows minus outflows: 18,000−21,000=−3,00018{,}000 - 21{,}000 = -3{,}000 (a negative net cash flow). The closing balance is the opening balance plus the net cash flow: 5,000+(−3,000)=2,0005{,}000 + (-3{,}000) = 2{,}000. Markers award marks for the net cash flow, the method (opening balance plus net cash flow) and the closing balance of 2,000. A common error is to ignore the minus sign on the net cash flow, which gives the wrong closing balance.

WJEC (Unit 1)6 marksAnalyse why a profitable business can still run out of cash, and how it could improve its cash flow.
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A 6-mark AO1, AO2 and AO3 question. Reward the explanation and the improvements.

Why: a business can be profitable over a year but still run short of cash in a month, for example if customers pay late, it has bought a lot of stock, or it has spent heavily on equipment, so the cash going out exceeds the cash coming in even though sales are profitable.

How to improve it: it could ask customers to pay sooner (or offer a discount for early payment), negotiate longer to pay suppliers, reduce stock held, or arrange an overdraft to cover the gap.

Chain and judgement: cash flow is about timing, not yearly profit, so even a profitable firm must manage the timing of money in and out; the best fix depends on the cause, for example chasing late payers if that is the problem. Markers reward the distinction between cash and profit plus developed improvements.

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