A genuinely profitable business can still collapse if it simply runs out of cash to pay its bills on time — profit and cash are not the same thing, and confusing them is one of the most dangerous mistakes in business.
Even a genuinely profitable business needs actual cash, physically available, to pay its immediate bills — wages, rent, suppliers — on the day they fall due. Profit on paper doesn't pay a supplier waiting for payment this week; only cash does. This is exactly why the business plan you met in 3.1.6 always includes a cash flow forecast alongside its profit projections — the two answer genuinely different questions.
Inability to pay suppliers, staff or rent on time; damaged supplier relationships and withdrawn trade credit terms (see 3.6.1); missed opportunities like bulk-purchase discounts; and, in serious cases, a business can be forced to close even while remaining profitable on paper.
Bills paid on time, stronger and more trusting relationships with suppliers and lenders, the ability to react quickly to opportunities, and a genuine buffer against unexpected costs or a slow month.
Profit is an accounting measure — revenue minus costs over a period, as you met in 3.1.6. Cash is the actual money physically available to the business right now. These can diverge significantly, and understanding why is one of the most important ideas in this entire topic.
A sale made on credit counts towards profit immediately, even though no cash actually arrives until the customer eventually pays — sometimes weeks or months later. Money can also be tied up in unsold stock or spent on new equipment, both of which reduce available cash without necessarily appearing as a cost against profit in the same period.
Imagine a business sells £10,000 of goods on 60-day credit terms. That £10,000 contributes to profit straight away in the accounts — but no cash actually arrives for two full months, during which the business still has to pay its own staff, rent and suppliers using whatever cash it already holds.
A cash flow forecast is a prediction of a business's cash inflows and outflows over a future period, usually broken down month by month. Businesses construct them specifically to spot a potential cash shortfall before it happens, giving time to act — arrange finance, delay a purchase, chase a late payment — rather than discovering the problem only once the money has actually run out. A forecast is also often required by a bank before it will agree a loan, since it demonstrates the business has genuinely thought through whether it can afford to repay it.
AQA won't ask you to build an entire forecast from scratch, but you do need to interpret one confidently. Every forecast is built from the same core components.
| Item | Month 1 (£) |
|---|---|
| Opening balance | 2,000 |
| Cash inflows (eg sales revenue received) | 15,000 |
| Cash outflows (eg rent, wages, supplier payments) | 17,500 |
| Net cash flow (inflows − outflows) | −2,500 |
| Closing balance (opening balance + net cash flow) | −500 |
Reading this table: the business started the month with £2,000 in cash (the opening balance). It received £15,000 in cash inflows but paid out £17,500 in cash outflows, giving a net cash flow of −£2,500 for the month. Adding that net cash flow to the opening balance gives a closing balance of −£500 — meaning the business would actually run out of cash before the month ends unless it takes some action. That closing balance then becomes next month's opening balance, carrying the problem forward if nothing changes.
Enter figures for a month and see how net cash flow and the closing balance are calculated.
Once a forecast reveals a genuine shortfall coming, AQA expects you to know — and evaluate — the realistic options a business has to address it.
Negotiating with suppliers or lenders to delay when money is due out can ease a temporary squeeze, though it depends on those relationships tolerating the request and may not be possible every month.
The flexible short-term source from 3.6.1 is often the fastest fix for exactly this kind of temporary gap, though it comes at the cost of interest.
Cutting or delaying non-essential spending directly narrows the gap, but cutting too aggressively risks harming quality (3.3.3) or staff morale (3.4.3).
Chasing customer payments faster, offering a discount for early payment, or pushing sales harder all bring cash in sooner — though each has its own cost or risk to profit margin.
A short-term loan, sale of an unwanted asset, or another source from 3.6.1 can plug a gap forecasting has revealed in good time.
Notice that none of these solutions is free — each one trades off against something else, whether that's cost, relationships, or quality. The right combination depends on how large the shortfall is, how temporary it's likely to be, and how much room the business has to negotiate with the people it owes money to or is owed money by.
Drag each item into the correct category.
State two possible solutions to a cash flow problem.
Structure guide: two correctly identified solutions — 1 mark each, no explanation required.
State and explain two consequences Alderney Print Solutions could face as a result of this cash flow problem.
Structure guide: state a consequence grounded in the case study (1 mark), explain it (1 mark) — repeated twice over.
Calculate Alderney Print Solutions' net cash flow and closing balance for the month. Show your working.
Structure guide: net cash flow = £18,000 − £21,000 = −£3,000. Closing balance = £2,000 + (−£3,000) = −£1,000. Marks are typically awarded for correct workings even if the final figure is wrong.
Analyse how negotiating extended payment terms with its own suppliers might help Alderney Print Solutions manage this cash flow problem.
Structure guide: a single developed line of reasoning grounded in the case study (eg: delaying payments owed to suppliers reduces this month's cash outflows → directly narrowing the £3,000 shortfall calculated above → giving Alderney Print Solutions more time for its largest client's overdue payment to actually arrive → though this depends on suppliers being willing to agree to the delay in the first place).
Recommend what Alderney Print Solutions should do to address its cash flow problem this month. Justify your answer using the case study.
Structure guide: a "recommend" question needs a justified judgement — weigh options such as an overdraft, chasing the late-paying client directly, or rescheduling its own supplier payments, considering that the underlying cause is a single client's late payment rather than a fundamental lack of profit, before reaching a clear final recommendation.