Learning objectives
- Distinguish revenue and expenses from cash receipts and payments.
- Build a dated cash view with explicit assumptions.
- Use scenarios to assess a business commitment without claiming a guaranteed result.
Keep three different views of the business
A profit view compares relevant revenue and expenses for a period under the accounting approach used. A cash view records when money actually enters or leaves. A position view considers resources and obligations, including receivables and payables. These views answer different questions. A profitable invoice can remain unpaid, so reported profit alone does not establish the ability to meet tomorrow’s bill.
Start with an opening balance and dates
For a useful planning period, list the opening available cash, expected receipts and expected payments with dates and responsible people. Keep committed payments separate from optional spending. Identify uncertain collection dates instead of hiding them in one optimistic total. Reconcile actual cash movements with reliable records so the next forecast starts from an accurate position, not the previous plan’s closing estimate.
Test the assumptions behind a commitment
Separate costs that change with delivered volume from costs that continue within the planned operating range. Ask how price, demand, rework and payment delays affect the proposal. Compare a base case with clearly described downside conditions. A scenario is an assumption set, not a prediction or a probability claim. Avoid multiplying sales while leaving support capacity, collection timing and delivery costs unchanged.
Use the plan as a review process
Assign owners to assumptions and review actual results against the plan. Explain differences rather than silently replacing the original figures. Define what would require delaying, resizing or reconsidering the commitment. Obtain appropriate accounting, tax or other specialist advice for the actual reporting obligations. The educational cash illustration below is not a statutory financial statement or an investment recommendation.
Profit and cash are related, but different
Use both views before judging whether an activity is financially workable.
Profit question
What revenue and expenses belong to the period under the accounting approach being used?
Cash question
When are receipts and payments expected, and what balance is available after them?
Assumption question
Which amounts or dates are uncertain, and who can verify them?
Decision question
Which change would make the planned commitment unaffordable or require a different scope?
Comparison
| Item | Profit view | Cash view |
|---|---|---|
| Revenue of 2000; 600 collected | Revenue 2000 in the simplified example | Cash receipt 600; 1400 remains receivable |
| Expenses of 1200; 900 paid | Expense 1200 in the simplified example | Cash payment 900; 300 remains payable |
| Opening cash 1000 | Not period revenue | Closing cash 1000+600−900=700 |
Hypothetical example: a profitable job with a cash constraint
An imagined service firm starts a period with 1000 cash units. In this simplified example it records 2000 revenue and 1200 expenses, but collects 600 and pays 900 during the period.
- Calculate the simplified profit: 2000−1200=800. This does not mean 800 cash arrived.
- Calculate closing cash: 1000+600−900=700. Track the remaining 1400 receivable and 300 payable separately.
- Before accepting extra work, examine collection dates, upcoming commitments and the downside if the customer pays later than expected.
The example shows why a profit figure cannot be used as the cash balance. The numbers illustrate the distinction only; they are not a forecast, accounting policy or promise of available financing.
Practical checklist
- Verify opening cash and outstanding obligations.
- Record expected receipts and payments by date.
- Label uncertain prices, volumes, costs and collection timing.
- Review downside conditions and the decision they would trigger.
Common pitfalls
Counting an invoice as cash already available
A recorded sale and an actual receipt occur at different times. Track collection rather than spending on the assumption that every invoice is immediately paid.
Using one optimistic forecast as certainty
A precise spreadsheet can still contain weak assumptions. Show what changes when demand, delivery cost or payment timing differs.
Questions and answers
Can a profitable business run short of cash?
Yes. Receipts can arrive after payroll, suppliers or other obligations fall due. The timing of cash movements must be examined separately from the period’s profit.
Does every business have to use the IAS 7 format shown in the source?
No claim is made here about a reader’s reporting obligations. IAS 7 is cited as a conceptual primary reference on cash-flow information; the appropriate requirements depend on the actual entity and jurisdiction.
Sources and further reading
- SBA: managing business financesU.S. Small Business Administration
Official introductory guidance on maintaining financial records and considering business costs and cash.
- IFRS Foundation: IAS 7IFRS Foundation
The standard-setter’s explanation of cash-flow information and its distinction from non-cash accounting movements.
