Explain what cash flow is and highlight how it is different from profit.

Cashflow is the movement of money in and out of the business. Cash inflows mostly comes from the money that the business earns from selling goods or services. Cash outflows are all its payments, which could be for instance the salaries of its employees or equipment. Profit on the other hand is a financial benefit, it is the difference between the amount earned and the amount spent. It is calculated as revenue less expenses. Profit must not necessarily increase a business’s immediately available cash and so a business may be profitable but have a negative cashflow. The difference between profit and cashflow is distinct and for a business both parameters are crucial for its success. If for example the business runs out of cash and cannot pay its dept it is at risk of insolvency. For this reason, businesses should do a cashflow forecast, which is a prediction of the net cashflow of the businesses over a year. The net cash flow is the total inflows minus the total outflows. This will allow it to plan ahead for months where there is less cash available. It is a useful tool to ensure that the business has enough cash available to pay suppliers and employees. To improve its cashflow the business can reduce its outflows, such as delaying payment to suppliers or getting better trade credit terms. It can also increase its cash inflows by ensuring that debtors pay on time or selling its assets.