Why Running Out of Money Doesn't Exactly Mean You're Broke: Cash Flow Covered

Running Out of Money Doesn't Necessarily Mean You're Broke (Until It Does)

It's Friday night, you've just finished your shift at that part-time job. Brilliant. You've earned £120 this week, and after paying for that Spotify subscription, the occasional coffee, and those late-night Uber Eats orders you definitely didn't need, you've technically "made money" this month. You're profitable!

Let's not get too ahead... it's the 28th of the month, your account shows £12.47, and your phone bill's due tomorrow for £25.

You're profitable. But you're also completely, utterly skint.

This is a good introduction to cash flow.

When Profitable Companies Go Spectacularly Bust

It was I believe, August 2023 when Wilko - that beloved high street shop your parents probably dragged you to for cheap cleaning supplies - collapsed into administration despite having 400 stores and making sales right up until the end. The chair, Lisa Wilkinson, told MPs something completely unbelievable: "We ran out of cash."

Hold on Mrs Wilkinson. You had 400 shops. You had some nice margins on some of the products you were successfully selling. How do you run out of cash?

Because - and this is the part that you better learn as quickly as possible - profit and cash flow are not the same thing.

Profit vs Cash Flow: The £460 Problem

Let's break this down with actual numbers because your IB Business Management examiners absolutely love this distinction.

Profit is what's left after you subtract all your costs from your revenue.

Simple maths: Revenue - Costs = Profit. Your business sells a product for £1,000, the direct costs were £540, so you've made a £460 contribution to profit. Lovely. You're "profitable."

Those £1,000? You might not actually have them yet, and you may well be waiting for days with your bank account showing a balance of -£460

Cash flow is the actual physical money moving in and out of your business. It's the difference between cash inflow (money you've actually received) and cash outflow (money you've actually paid). And these two things can be completely different.

You sell someone a laptop for £1,000 on trade credit - they've got 30 days to pay you. On paper, you've just made a profit. Your accounts look great. But right now, at this exact moment, you've got £0 in your bank account from that sale. Meanwhile, you still need to pay your staff tomorrow. And your rent. And that electricity bill.

See the problem?

IB Business Management Real-life Example: The Wilko Story

Wilko's cash flow issues became evident when they started deferring (postponing) supplier payments and begging landlords to switch to monthly rents instead of quarterly. Even worse, credit insurers pulled their cover, which meant suppliers started demanding payment upfront.

Imagine going to Tesco and them saying "Actually, we need you to pay us first, then we'll give you the bread in 30 days." That's essentially what happened to Wilko. They were making sales in their shops, but they had no cash to buy the stock to sell in the first place.

They paid out £2.5 million in dividends in 2022 and another £750,000 in early 2023 - literally giving money to shareholders whilst simultaneously running out of cash to pay suppliers. Similar to buying a new BMW when you can't afford your rent.

This is why small businesses obsess over cash flow more than profit, especially in the short term. You can be profitable on paper and still go bankrupt if you don't have actual money to pay your bills. In fact, 82% of businesses that go under do so because of cash flow problems, not because they weren't profitable.

Working Capital: The Money You Need Right Now

Working capital (also called net current assets) is basically the money your business has available right now for operational stuff. It's what's in the bank account to buy raw materials, pay wages, or cover that invoice that's due next Tuesday.

The formula's dead simple:

Working Capital = Current Assets - Current Liabilities

Think of it as: "What I've got" minus "What I owe".

Without working capital, you literally cannot operate. You can't buy stock, you can't pay staff, you can't do anything. You're frozen.

The Working Capital Cycle: Why Timing Is Almost Everything In Business

The working capital cycle is basically the time lag between when you pay for stuff and when you actually get paid for selling it.

Here's how it works in real life:

1. You pay cash for raw materials (cash goes out)

2. You make/store the product (more costs, more cash out)

3. You sell the product (yay! but...)

4. Customer pays on 30-day credit terms (no cash yet)

5. 30 days later: Cash finally comes in

That's your working capital cycle. And the longer it is, the more dangerous your position becomes.

Short working capital cycles = Less stressful. Think about McDonald's or Tesco. They sell stuff for cash immediately, but pay their suppliers on credit. They're basically holding YOUR money before they've paid their bills. Genius.

Long working capital cycles = Absolute nightmare. Think about aircraft manufacturers like Airbus. They've got to buy materials, employ thousands of people, spend years building the plane, and customers pay in instalments over time. They're bleeding cash for ages before seeing any money back.

In 2024, UK invoices were paid on average 7.3 days late, which might not sound like much, but when you're a small business with tight margins, those 7 days can be the difference between making payroll or not, between surviving or not.

Liquidity: Can You Turn Your Stuff Into Cash Quickly?

Liquidity is all about how quickly you can convert what you own into actual spendable cash without losing value.

High liquidity = Can sell immediately at full price (like cash itself, or stock in a massive company like Apple)

Low liquidity = Takes forever to sell or you have to drop the price massively (like trying to sell a used car quickly - you'll get lowballed)

Your liquid assets (shown as current assets on the balance sheet) include:

• Cash (obviously)

• Money owed to you by customers (debtors)

• Stock you can sell (inventory)

Liquidity matters because it shows whether you can handle unexpected costs or financial obligations. Can you pay that surprise tax bill? Can you cover payroll if a major customer pays late? How about that computer not working properly? Can you buy a new one?

IB Business Management examiners love asking about ratio analysis here - specifically the current ratio and acid test ratio. The higher these ratios, the healthier your liquidity position.

Lower ratios = potentially in trouble.

Cash Flow Forecasts: A Crystal Ball for Your Bank Account?

A cash flow forecast is exactly what it sounds like - predicting how much cash you'll have coming in and going out over the next 6-12 months.

Exactly like checking the weather before a camping trip. You wouldn't go camping without checking if it's going to absolutely chuck it down, right? Same with business - you don't want to commit to a massive order if you're going to run out of cash in 3 months.

Here's what you need to know:

Net cash flow = Cash inflow - Cash outflow

Pretty straightforward. Money in minus money out.

Closing balance = Opening balance + Net cash flow

This is the amount you'll have at the end of the period. And crucially, this becomes your opening balance for the next period.

Let's Do Some Actual Maths (Don't Skip This Bit)

The IB Business Management loves giving you cash flow calculations, so here's how to deal with them:

Example 1: A company starts the month with £70,000 (opening balance). During the month, £120,000 comes in (inflow) and £80,000 goes out (outflow). What's the closing balance?

Net cash flow = £120,000 - £80,000 = £40,000
Closing balance = £70,000 + £40,000 = £110,000

Example 2: A company forecasts a closing balance of £150,000. But then they discover that a £17,000 payment wasn't processed, and they've got a £13,000 invoice they forgot about. What's the actual closing balance?

Missing payment means LESS cash coming in: -£17,000
Forgot invoice means MORE cash going out: -£13,000
Revised closing balance = £150,000 - £17,000 - £13,000 = £120,000

See how quickly things change? One missed payment and suddenly you're £30k shorter than expected.

Why Cash Flow Forecasts Are Relevant

About 72% of UK small businesses experience cash flow problems, and most of them could avoid it with decent forecasting.

Cash flow problems happen because of:

• Sales being lower than expected (that "guaranteed" client pulls out)

• Costs being higher than budgeted (inflation, anyone?)

• Unexpected costs (equipment breaks, surprise tax bill)

• Customers who pay late or don't pay at all (bad debts)

• Overstocking products that don't sell

Being able to predict these problems means you can actually do something about them before calling the bank and begging for an overdraft.

Investment vs Cash Flow: The Long Game

Here's another thing that impacts cash flow: investment.

Investment means buying non-current assets - premises, equipment, machinery, that fancy new computer system. These are things that'll help you make money in the future, but right now they're just a massive cash outflow.

Think about Netflix in its early years. They invested BILLIONS into creating original content - money absolutely flooding out the door - because they knew it would pay off long-term. Short-term cash flow? Absolutely terrible. Long-term profitability? Brilliant strategy.

Or look at the failures: HMV, Blockbuster, Kodak. They didn't invest enough in adapting to change. They focused on short-term profits, didn't invest in the future, and got absolutely destroyed by companies that did.

The key is that successful investments lead to improved cash flow and profitability... eventually. But in the short term, you're sacrificing cash. And if you run out before the investment pays off? Game over.

How to Fix Cash Flow Problems (Without Going Bust)

Your cash flow forecast shows you'll be £20,000 short in 3 months. What do you do?

You've got three options:

1. Reduce cash outflows,

2. Improve cash inflows, or

3. Find additional finance

Reduce Cash Outflows:

• Get better trade credit terms - Ask suppliers if you can pay in 60 days instead of 30

• Offer early payment discounts - "Pay within 10 days, get 5% off" (gets cash in faster)

• Reduce credit offered to customers - Stop giving everyone 30 days; make some pay upfront

• Lease instead of buy - Don't buy that £40,000 van; lease it for £500/month

• Hold less stock - Stop having thousands of pounds sitting in a warehouse

• Renegotiate rent - Move to cheaper premises or negotiate a better deal

• Bulk-buy deals - Order more to get discounts (but watch the stock costs)

Improve Cash Inflows:

• Better marketing - More customers = more sales = more cash

• Raise prices - If you've got strong brand loyalty (think Apple), customers will pay more

• Lower prices - If you're in fierce competition (think budget airlines), drop prices to increase volume

• Better product mix - Stock more of what actually sells, ditch the dead weight

Find Additional Finance:

• Overdrafts or loans - Quick cash to cover gaps (but costs you in interest)

• Sell non-current assets - Flog that old equipment you're not using

• Take on a partner - Bring someone in who can inject cash

• In extreme cases - Sell major assets like subsidiary companies

In 2024, 24% of UK small businesses said cash flow and working capital shortages were barriers to growth. This isn't rare. This is constant.

The Brutal Truth

82% of business failures are down to poor cash flow management. Not bad products. Not lack of customers. Cash flow.

You can have the best product in the world, amazing sales, a queue out the door... and still go bust if you can't manage the timing of money coming in versus money going out.

Wilko made £1.6 billion in revenue at their peak. And they still ran out of cash and collapsed. Twelve thousand jobs gone because they couldn't manage the gap between paying suppliers and receiving customer payments.

IB Business Management Exam Gold

When you get a cash flow question in your IB exam, they're not just testing if you can do the maths (though you absolutely need to get that right). They want to see that you understand:

1. Cash flow ≠ Profit - You can be profitable and still go bankrupt

2. Timing is everything - When money moves matters as much as how much money moves

3. Working capital is survival - Without it, you literally cannot operate

4. Forecasting prevents disasters - Predicting problems means you can fix them

5. Solutions depend on the problem - Different causes need different strategies

Look for negative cash flow figures in questions. Look for negative closing balances. That's where the problems are, and that's where the marks are for identifying issues and suggesting solutions.

Because IB Business Management isn't about having all the answers - it's about spotting the problems before they become an impossible task.

And in 2024, with nearly 30,000 UK firms failing, that skill has never been more valuable.

IB Business Management Summary:

• Profit is what you earn on paper; cash flow is what's actually in your bank account

• Working capital = Current Assets - Current Liabilities (money available right now)

• The working capital cycle measures the time lag between paying costs and receiving cash

• Cash flow forecasts predict future cash positions: Closing Balance = Opening Balance + Net Cash Flow

• 82% of business failures are caused by cash flow problems, not lack of profit

• Fix cash flow by reducing outflows, improving inflows, or finding additional finance

Stay well,