Plan finance and distinguish cash from profit
Explain why firms need short- and long-term finance, why profit is not cash, and how financial distress can threaten survival.
Section 5.1 · Business finance
Cambridge International AS & A Level Business 9609, 2026–2028 syllabus and 2029 syllabus, section 5.1.1. Cambridge states that both current versions have no significant changes affecting teaching. This lesson maps only its named section; other sections and full paper practice remain separate. Written practice is self-checked
Before you begin
- No previous business course is assumed. Use the lesson's definitions before applying them to the business context.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
What is a key difference between profit and cash?
What you will learn
- Explain finance needs at different stages
- Distinguish cash from profit
- Explain how a cash shortage can lead to business failure
Finance supports starting, operating and growing
A business may need finance to start up, buy equipment, recruit workers, meet daily bills, expand or survive a temporary shortfall. Short-term needs include working capital and seasonal costs; long-term needs may include premises, vehicles or major systems.
Match the finance horizon to the need where possible. Using short-term borrowing to fund an asset that takes years to generate returns may create repayment pressure before the investment pays back.
Profit and cash measure different things
Profit is revenue minus expenses for an accounting period. Cash is money received and paid. A sale made on credit can increase revenue and profit before the customer pays; buying equipment may use cash immediately while its accounting cost is spread over time.
A profitable business can run short of cash if customers pay late, inventory grows or large bills fall due. Persistent inability to meet obligations can lead to insolvency and failure. Bankruptcy, liquidation and administration are legal processes with jurisdiction-specific meanings; they should not be treated as interchangeable labels.
Pause and explain
A business makes a credit sale in March and receives payment in April. What can happen in March?
Worked example
A wholesaler reports a profit of $18,000, but customers owe $42,000 and a large supplier bill is due this week. Explain how it can still face a cash problem.
Show the worked solution
- Credit sales may be recorded before cash is received.
- The supplier payment is due now while customer receipts are delayed.
- A profit figure does not show the timing of cash flows.
Answer The wholesaler may have earned revenue and profit on credit sales, but cash from the $42,000 receivable has not arrived. If the supplier bill falls due first and available cash is insufficient, the business can have a liquidity problem despite reporting a profit.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A new café needs an oven for five years and cash for its first three months of wages and ingredients. Identify the two finance needs and explain why their timing differs.
Give me a hint
Separate the long-lived asset from the short-run operating requirement.
Compare my reasoning
- The oven is a long-term asset used across several years.
- Wages and ingredients are short-term operating needs.
- Consider the repayment timing against the benefits or cash cycle.
The oven is a long-term finance need because it supports operations over several years. Initial wages and ingredients are short-term working-capital needs. The café should consider whether each source's repayment schedule fits when cash is expected to be generated.
Look for these in your work
- Both needs are identified
- Their time horizons are distinguished
- Timing is linked to finance choice
A firm reports $9,000 profit but has $2,000 cash, $14,000 receivables and $10,000 due to suppliers next week. Explain the immediate risk and one information managers should check.
Give me a hint
Compare the timing of expected receipts with due payments.
Compare my reasoning
- Profit does not tell whether receivables have been collected.
- Compare due dates and expected cash receipts with the $10,000 payable.
- Check the cash forecast, overdue accounts and available facilities.
The firm may be unable to pay suppliers on time if customer receipts arrive later than the $10,000 payment. Managers should check a dated cash-flow forecast, the collectability and due dates of receivables, and any usable overdraft or other facility.
Look for these in your work
- Cash timing is distinguished from profit
- Immediate obligation is considered
- Useful evidence is identified
Explain how a long period of unpaid customer invoices could threaten a business even while sales remain strong.
Give me a hint
Trace the gap from credit sales to cash available for obligations.
Compare my reasoning
- Credit sales can increase revenue before collection.
- Unpaid invoices delay cash needed for wages and suppliers.
- If the gap persists, finance costs or inability to pay can threaten survival.
Strong credit sales can raise reported revenue without providing cash. If customers pay late, the business may lack funds for wages, suppliers or loan repayments, increasing borrowing costs and potentially preventing it from meeting obligations.
Look for these in your work
- Revenue and receipts are separated
- Cash commitments are named
- A plausible failure mechanism is explained
Common mistakes
- Treating profit as the bank balance
- Assuming long-term assets should always be funded by short-term borrowing
- Using bankruptcy, liquidation and administration as synonyms
What can you explain now?
What is a key difference between profit and cash?
Compare with the explanation
Profit is an accounting result; cash records money received and paid
Credit timing can separate profit recognition from cash movement.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Why can a profitable business need more finance, and how should a finance need's time horizon influence borrowing?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.