Cash is the fuel that keeps a business's engine running — and a genuinely profitable business can still stall completely if it simply runs out of fuel.
Cash is the physical money a business has available right now, in its bank account or till, that it can spend immediately. This is genuinely different from the profit you calculated in 1.3.2 — profit is worked out over a period of time, while cash is what's actually available at this precise moment.
Rent, wages and supplier invoices all need to be paid with real cash on the day they're due, whatever the business's profit figure happens to say.
Insolvency is when a business cannot pay its debts as they fall due — a business can be forced to close for this reason alone, even while remaining profitable on paper.
A business can be genuinely profitable and still run out of cash, most commonly when customers haven't paid yet or when a lot of cash has been spent on new equipment.
A cash-flow forecast predicts a business's cash inflows and outflows over a future period, usually broken down month by month, giving a business time to act on a problem before it actually happens.
The closing balance for one month becomes the opening balance for the next, carrying any shortfall (or surplus) forward automatically.
| Item | January (£) | February (£) | March (£) |
|---|---|---|---|
| Opening balance | 1,500 | 500 | (500) |
| Cash inflows | 12,000 | 12,000 | 14,000 |
| Cash outflows | 13,000 | 13,000 | 13,000 |
| Net cash flow | (1,000) | (1,000) | 1,000 |
| Closing balance | 500 | (500) | 500 |
Notice how each month's closing balance carries straight into the next month's opening balance. January starts with £1,500, but loses £1,000 in net cash flow, closing at £500. February starts from that £500, loses another £1,000, and closes negative at (£500) — shown in brackets, the standard way negative figures appear on an Edexcel exam paper. By March, higher inflows finally push net cash flow positive again, but only enough to bring the closing balance back to £500, not to erase the shortfall entirely.
Spotting this pattern in advance is exactly why forecasts matter: a manager seeing February's negative closing balance ahead of time can arrange an overdraft or loan before the shortfall actually happens, rather than being caught out by it.
Drag each item into the correct category.
Standalone questions below are typical of Section A — no case study needed. The 6 and 9-mark questions are built around a Source Booklet–style case study, matching how Section B and C actually work in the real exam.
Which one of the following is a cash outflow?
A. Cash received from a customer
B. A new loan paid into the business account
C. Payment made to a supplier
D. Cash received from selling an unused asset
Answer: C.
A business has cash inflows of £10,000 and cash outflows of £7,000 this month. Calculate the business's net cash flow.
Answer: £10,000 − £7,000 = £3,000. Full marks are typically awarded for the correct final answer, though showing working is good practice.
Explain one reason why cash is important to a business.
Structure guide: 1 mark identifying a reason, plus 2 further marks developing it — eg "Cash is needed to pay suppliers, employees and overheads (1), since these bills must be paid immediately (1), regardless of how much profit the business has made on paper (1)."
Using the information above, calculate Hartley Print Co's net cash flow and closing balance for the month.
Answer: net cash flow = £12,000 − £14,000 = −£2,000. Closing balance = £1,500 + (−£2,000) = −£500.
Analyse the impact on Hartley Print Co of its largest client's 60-day credit payment terms.
Structure guide: application (AO2) and analysis (AO3a) together — eg identify that the client doesn't pay for 60 days after a sale is made (AO2), then analyse how this delays cash actually arriving even though the sale has already boosted profit on paper, contributing directly to the negative closing balance calculated above, and meaning Hartley Print Co could struggle to pay its own suppliers and staff despite genuinely being profitable (AO3a).
Hartley Print Co is considering two options to address this cash-flow problem: negotiating shorter payment terms with its client, or arranging an overdraft with its bank. Justify which option Hartley Print Co should choose.
Structure guide: apply knowledge to Hartley Print Co's specific situation (AO2), analyse points on both sides (AO3a) — negotiating shorter terms tackles the root cause but depends on the client agreeing, while an overdraft is more immediately within Hartley Print Co's own control but adds interest costs — then reach a clear, justified choice (AO3b).