Why cash flow matters comes down to something very simple.

Your business has bills to pay.

Staff need their wages. Suppliers need paying. Loans need servicing. Overheads keep arriving. And somewhere in all of that, you need to pay yourself too.

Those commitments are settled with cash, not promises.

A business can survive periods of low profit. It may even survive periods of loss. But without access to cash, the clock starts ticking very quickly.

About this episode

Everybody wants their business to survive.

Hopefully, we also want it to thrive, grow and prosper.

Cash is one of the things that makes that possible.

In this episode, we look at why cash flow is such a big deal, why cash and profit are not the same thing, and how to start building a picture of your future cash position.

The aim is not to turn you into a fortune teller.

It is to give you more control.

Why cash flow matters to every business

Cash is the lifeblood of a business, whether you are a sole trader working on your own or running a much larger organisation.

Money coming into the business allows us to:

pay staff
settle supplier bills
cover rent and overheads
repay loans
invest in equipment and growth
pay ourselves

If cash does not arrive at the right time, those commitments do not disappear.

That is why looking only at sales or accounting profit can create a false sense of security.

Profit and cash are not the same thing

A profitable business can still run out of cash.

That sounds strange until we look at timing.

Imagine we make a £1,000 sale in September and give the customer 30 days to pay.

The sale may belong to September from an accounting point of view, but the cash might not arrive until October.

Meanwhile, wages, rent and suppliers may all need paying in September.

That gap is where cash-flow pressure starts.

“Sales are vanity, profit is reality, and cash is sanity.”

That is the holy trinity of sales, profit and cash.

For a deeper explanation, see how cash is different from profit.

Your cash story starts before the numbers

One of the most useful ways to think about a cash forecast is as a cash story.

Before filling a spreadsheet with numbers, think about what is actually going to happen in the business.

All forecasts begin with a story.

We use three simple questions:

What? What activity is likely to happen?
When? When will the cash actually enter or leave the bank?
How much? What financial value should we attach to it?

Do not rush straight into numbers.

Understand the activity first. Then translate that activity into cash.

The what, when and how much of cash coming in

Start with the money entering the business.

For most businesses, the main source will be customers buying products or services.

Ask:

What are we expecting to sell?
When will we make those sales?
What payment terms do customers receive?
When will the money actually reach the bank?
How much cash will arrive?

Suppose we expect to sell 100 products in September at £10 each.

That gives us £1,000 of sales.

If customers have 30 days to pay, the £1,000 may not appear in the bank until October.

Other cash coming in could include:

loans
grants
investment
the sale of surplus assets

The same rule applies to all of them: what, when and how much?

Apply the same thinking to money going out

Now look at the other side of the cash story.

Cash leaving the business can include:

supplier payments
staff wages
freelancers
rent
utilities
loan repayments
tax
equipment purchases
other regular commitments

Again, ask what needs paying, when the money actually leaves the bank and how much it will be.

Timing matters just as much for costs as it does for sales.

A supplier invoice may arrive in September but not need paying until October.

Staff wages, on the other hand, may need paying at the end of September regardless of when customers pay you.

Fixed and variable costs affect your cash story

Some cash outgoings stay relatively stable.

Rent is an obvious example.

Other costs move depending on activity.

A product business that expects to sell more may also need to buy more stock or materials.

So do not increase sales in your forecast without considering what has to happen on the cost side to support those sales.

Your business story needs to join up.

What does the cash forecast tell you?

Once we put the cash coming in and cash going out together, the picture starts to become useful.

For each month, we can see whether the business generates:

a cash surplus, where more money comes in than goes out
a cash deficit, where more money goes out than comes in

Add the cash already sitting in the bank and we can begin to see what our cash cushion may look like at the end of each month.

This is where the numbers start telling the story back to us.

We may discover a difficult month coming up.

We may see cash building that could support investment or growth.

Either way, knowing before it happens gives us options.

Do not edit reality out of your forecast

One temptation when preparing forecasts is to make the answer look nicer.

Don’t.

If the business is growing and that growth requires investment, put it in.

If conditions are difficult and costs need tightening, reflect that too.

The forecast is there to tell us the truth as best we can see it.

“Numbers are the most frightening part of your business, but they’re also the most truthful.”

Numbers can sometimes be uncomfortable, but they are much more useful when we allow them to be truthful.

Use what-if planning

A cash forecast becomes even more useful when we start asking what if?

For example:

What if sales fall by 20%?
What if costs rise by 5%?
What if customers pay a month later than expected?
What if an equipment purchase needs to happen earlier?

This is contingency planning.

We are not predicting that those things definitely will happen.

We are asking what the cash consequences would be if they did.

That gives us time to think before we need to react.

What can you do when a cash shortage appears?

If the forecast reveals a difficult period ahead, we can start looking at the choices available.

Could a cost be challenged?

Could a purchase be delayed?

Could we use another supplier?

Could customer payments be brought forward?

Could financing be arranged before the situation becomes urgent?

This is not about slashing every cost in sight.

It is about seeing pressure early enough to make sensible decisions.

For practical strategies once you know where the pressure is, see our guide to cash flow management strategies.

How far ahead should you look?

Ideally, build a rolling 12-month view.

That gives us enough time to see upcoming pressure points, larger commitments and changes in activity.

If 12 months feels too much when you are starting, work with three to six months.

Three months of useful forecasting is better than twelve months of nothing.

Then keep updating it as circumstances change.

If you want the detailed forecasting process, see our eight tips for cash flow forecasting.

A simple cash flow checklist

Write down your future business story.
Identify the cash coming in.
Ask what, when and how much.
Identify every important cash outgoing.
Put receipts and payments in the period when the cash actually moves.
Calculate the monthly surplus or deficit.
Add your opening bank balance.
Look for cash shortages and surpluses.
Test some what-if scenarios.
Update the forecast as the business changes.

You can also see our guide on how to build your cash flow.

FAQs

Why is cash flow important in business?

Cash allows the business to meet its commitments when they fall due. Without enough cash, a business can struggle to pay staff, suppliers, lenders, tax and other costs even when it appears profitable on paper.

Can a profitable business run out of cash?

Yes. Profit and cash are different. Sales may be recorded before customers actually pay, while bills may need settling sooner. Those timing differences can leave a profitable business short of cash.

What is a cash flow forecast?

A cash flow forecast estimates when money is expected to enter and leave the business over a future period so that you can see likely shortages or surpluses before they happen.

What does what, when and how much mean?

It is our simple framework for building the cash story. Identify what is going to happen, when the cash effect will occur and how much money will enter or leave the business.

How far ahead should a cash flow forecast go?

We prefer a rolling 12-month view. If that feels too difficult initially, three to six months is still a useful place to start.

What is what-if cash flow planning?

It means changing assumptions in your forecast to test possible scenarios, such as lower sales, higher costs or slower customer payments, and seeing what those changes would do to your cash position.

Episode Timecodes

00:28 – Why cash is critical to survival and growth
01:43 – The bills and commitments cash needs to cover
02:19 – Cash as the lifeblood of the business
02:45 – Sales, profit and cash
03:10 – Building a cash flow forecast
03:50 – Creating your future cash story
04:18 – What, when and how much
05:13 – Forecasting cash coming in
06:20 – Forecasting cash going out
08:35 – Monthly cash surpluses and deficits
09:18 – Making the forecast reflect reality
10:00 – What-if and contingency planning
10:56 – Acting on future cash pressure
11:36 – Using future cash surpluses
12:47 – Final cash flow summary

Related episodes and guides

Key takeaway

Why cash flow matters is easy to summarise.

No cash, no business.

Understand what is likely to happen, when the cash will move and how much money is involved.

Turn that into your cash story.

Then use the forecast to identify pressure, test what-if scenarios and make decisions before circumstances make those decisions for you.

Sales are vanity, profit is reality, and cash is sanity.

Further Support

If you need help understanding your cash position or building a cash flow forecast, you can contact us for an initial chat.

You can also use our free online business calculators to support your financial planning.

For more practical finance and tax guidance, visit the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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Why Cash Flow Matters in Business: No Cash, No Business