Cash flow forecasting and working capital

Why cash is not profit

Profit is recorded when a sale is made; cash arrives when the customer pays. A business can report record profits and still fail, because wages, suppliers and loan repayments are settled in cash. This is the single most important idea in business finance.

Building a cash flow forecast

Three blocks each month: cash inflows (cash sales, receipts from credit customers, loans, asset sales), cash outflows (materials, wages, rent, interest, capital expenditure), and the running balance:

$\text{Số dư cuối kỳ} = \text{số dư đầu kỳ} + \text{tổng thu} - \text{tổng chi}$

The closing balance of one month is the opening balance of the next — get that wrong and every later month is wrong.

What a forecast is for

It shows when cash will run short, so finance can be arranged in advance rather than in a panic. Banks require one before lending. It also shows whether a shortage is temporary — in which case an overdraft is right — or structural, which needs a different solution.

Its limitations

Every figure is an estimate. Sales forecasts can be optimistic, customers pay later than assumed, and unexpected costs arise. That is why a forecast should be revised regularly and tested with a pessimistic scenario.

Managing working capital

Too little working capital means insolvency risk; too much means cash tied up in idle inventory and slow receivables. The levers are receivables (credit control, discounts, factoring), inventory (JIT, removing slow lines) and payables (negotiating longer terms). Each lever has a cost, and naming that cost is where the evaluation marks are.