What is cash flow?

Cash flow is the movement of money into and out of a business over a period: what came in, what went out, what was left. It is not profit; a profitable business can run out of cash waiting to be paid.

A plain-English definition for UK small businesses, not tax advice. Where a figure changes at a Budget, check gov.uk or ask your accountant.

LAST REVIEWED 29 AUGUST 2026 · BIZZLE

Why does cash flow matter more than profit?

Profit is an opinion about a period. Cash is what is in the bank on Friday when wages are due. Businesses do not close because they made a loss on paper; they close because they could not pay someone on the day it mattered.

The gap between the two comes from timing. You pay for materials in March, do the work in April, invoice in May and get paid in June. The profit was earned in April. The cash arrived three months later, and in between the bank balance had to hold.

Watching cash flow means knowing, week by week, what is due in, what is due out, and whether the difference stays above zero. A forecast does not need to be clever; it needs to be looked at.

A worked example

A caterer's cash flow for one quarter. She is profitable across the three months, but April is a problem.

AprilMayJune
Opening bank balance£3,000£(1,200)£2,900
Received from customers£5,800£12,400£9,100
Wages paid£(3,200)£(3,200)£(3,200)
Ingredients and suppliers£(2,100)£(3,600)£(2,800)
Rent£(900)£(900)£(900)
VAT paid to HMRC£(3,800)£0£0
Closing bank balance£(1,200)£2,900£5,100

What does the example show?

April's shortfall is not a trading problem. Two wedding invoices from March were paid in May instead of April, and the quarterly VAT bill fell in the same month. She knew the VAT was coming; she did not know the customers would be late.

The fix was not more sales. It was chasing the two invoices a week earlier, agreeing a deposit on future weddings, and putting the VAT aside monthly so the quarterly payment stopped being a shock. Cash flow problems are mostly timing problems, and timing can be managed.

TERMS USED ON THIS PAGE

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COMMON QUESTIONS

Questions people ask.

What is a cash flow forecast?

A projection of money in and money out, usually week by week or month by month, starting from the bank balance today. Known items — rent, wages, VAT, loan repayments — go in first, then expected receipts from invoices already issued. The point is to see the low point before it arrives.

Is positive cash flow the same as profit?

No. A business can have positive cash flow and no profit — by taking a loan, collecting old debts or delaying paying suppliers — and a profit with negative cash flow, by buying equipment or growing faster than customers pay. Over a long enough period they converge; over any given month they do not.

What is the quickest way to improve cash flow?

Get paid faster. Invoice the day the work is done, take deposits, offer card or instant bank payment, and chase on the due date. Those four change the timing of money already earned, which is faster than finding new sales, and they cost nothing but a little discipline.

Does a cash flow statement have to be filed?

Not by small companies. A cash flow statement is one of the primary financial statements in full accounts, but small and micro companies are exempt from including one. Sole traders never file one. It remains the most useful of the three statements for actually running the business.

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