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Cashflow is the amount of money coming in and out of a business. Cashflow is important because if a business does not have any money they will find it difficult to complete their business activities. For example a business needs money to buy goods and to pay wages

Cashflow diagram showing examples of cash in and cash out
This diagram provides examples of cash in and cash out for a cashflow analysis

Where Does Money Come From? (Cash in)

Businesses may receive money from the following sources:

  1. Sale of goods or services
  2. Money borrowed from a Bank – loans, overdrafts
  3. Sale of business premises

What is Money Spent On? (Cash out)

Businesses have to spend money on a variety of things including:

  1. Purchase of stock
  2. Employee salaries
  3. Rent
  4. Loan repayments

Cash or Profit – Are They The Same?

It easy to confuse cash with profit; profit is the amount of money the business has from the sale of goods (services) after you deduct the cost of producing or buying the goods sold. Cash is the amount of money the business has; it can include the profit money (from the sale of goods) but it is not the same as profit as cash can come from sources other than profit.

Just because a business has lots of money doesn't mean that it is profitable, as the business' money could be from sources other than profit. Conversely a business can be profitable but not have cash, if cash outflow is more than the profit that the company is making.

Cashflow Forecast

A cashflow forecast shows the amount of money a business is likely to receive and pay out in the coming months i.e. cash inflows and cash outflows. A cashflow forecast will show where the money will come from and what money will be spent on; it will include payments from creditors and payments to suppliers.

What Is A Cashflow Deficit?

If the closing balance on the cashflow forecast is negative this is known as a deficit. A deficit means that the amount of money leaving the business is greater than the amount of money coming into the business.


Cashflow forecasts help businesses manage future business activity. Cashflow forecasts help businesses identify future cashflow problems and manage them accordingly. However cashflow forecasts are only estimates. Cashflow forecasts are useful if they are realistic and include safety margins to cover events that reduce the amount of cash expected to come into the business (cash inflow) or events that could increase the amount of cash expected to leave the business (cash outflow). Cashflow management is very important; lots of businesses fail in the first year because they do not manage their cashflow effectively.

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