Question 1

If a business is profitable, doesn't that mean its cash flow is good?

Accepted Answer

Not necessarily. Profit and cash are different. A business records a profit when a sale is made, but it may not receive the cash until weeks or months later if the sale was on credit. A profitable business can easily run out of cash (become insolvent) if it fails to manage its debtors and working capital effectively. This is why cash flow forecasting is critical even for profitable firms.

Question 2

Why is depreciation not included in a cash flow forecast?

Accepted Answer

Depreciation is a non-cash expense. It is an accounting concept used to spread the cost of a fixed asset over its useful life and is included in the Income Statement to calculate profit. However, no physical cash leaves the business when depreciation is recorded. A cash flow forecast only tracks actual movements of cash, so depreciation is excluded.

Question 3

Is a cash flow forecast always accurate?

Accepted Answer

No, it is a forecast, not a statement of fact. Its accuracy depends on the quality of the data and assumptions used. Sales forecasts may be overly optimistic, or unexpected costs can arise (e.g., machine breakdown). While it may not be perfectly accurate, it remains an invaluable planning tool that forces management to think about the future and allows them to react more quickly to changes.

Cash flow forecasts

What you need to know

Timing of money in and out