3.7.1—Profit and cash flow

Profit is revenue minus the costs recognised for a period; cash flow tracks money actually entering and leaving the business. A firm can report profit while lacking cash because customers have not paid or cash is tied up elsewhere.

Cash-flow forecasts separate inflows, outflows, net cash flow, opening balance and closing balance. Net cash flow = total inflows − total outflows; closing balance = opening balance + net cash flow, and it becomes the next period’s opening balance.

If a month has £2,800 inflows and £4,414 outflows, net cash flow is −£1,614. A positive opening balance can absorb the shortfall, but a later negative closing balance signals when finance or a change in timing is needed.

Profit is not cash and a forecast is not a guarantee. Check collection timing, loan receipts, supplier payments and assumptions before deciding whether the business is safe.