Cash Flow — slides
Financial Literacy Club
Understanding Businesses · Lesson 6
Cash Flow
Why profitable companies can still run out of cash.
14-minute lesson · learnwithflc.org
Cash Flow · 1 / 18
Financial Literacy Club
Understanding Businesses · Lesson 6
Cash Flow
Why profitable companies can still run out of cash.
14-minute lesson · learnwithflc.org
Today's goals
By the end of class, you'll be able to…
- Explain why profit and cash can differ
- Name the three sections of a cash flow statement
- Calculate free cash flow
Warm-up
You sell $500 of cookies to a school club that will pay you next month. You owe your supplier $300 today. Can you pay?
Think, then write your answer.
The big idea
Cash Flow
Why profitable companies can still run out of cash.
Understanding Businesses · Lesson 6
Profit and cash are not the same thing. A business can record a sale — and a profit — long before the customer actually pays. Meanwhile, it still has to pay its suppliers and employees on time.
Understanding Businesses · Lesson 6
The cash flow statement tracks actual money moving in and out, in three groups:
- Operating: cash from running the business — customers paying, suppliers and employees being paid.
- Investing: buying or selling long-term assets like equipment or buildings.
- Financing: borrowing, repaying loans, or raising money from owners.
Vocabulary
Free cash flow
Operating cash flow minus spending on long-term assets. It's the cash a business actually generates that it could use to grow, repay debt, or return to owners.
Understanding Businesses · Lesson 6
Fast growth can be a cash trap. More orders mean more inventory and wages up front, while customer payments arrive later. Many businesses fail not because they're unprofitable, but because they run out of cash.
See it
A business gets an order, pays for materials and wages right away, then delivers and records the sale as revenue. The customer pays 90 days later. In between, profit exists on paper while cash has gone out.
Order arrives
Great news
Pay materials & wages
Cash goes out now
Deliver & invoice
Revenue and profit recorded
Customer pays
Cash comes in 90 days later
Real example
Profitable and broke
Bright Signs, a hypothetical sign shop, lands a $50,000 order from a school district. Materials and labor cost $30,000, so the job earns a $20,000 profit.
- The shop pays the $30,000 in costs in September.
- It delivers in October and records the $20,000 profit.
- But the school district pays invoices 90 days later — in January.
- Bright Signs only had $12,000 in the bank. By November, it can't make payroll.
The fix wasn't more profit — it was cash planning: asking for a deposit up front, arranging a line of credit, or negotiating faster payment.
Activity · small groups · 12 min
Profitable and Broke
- A business starts with $5,000 in cash. Every month it sells $5,000 of goods, pays $3,000 for them right away, and pays $1,000 of other expenses. Customers pay two months after each sale.
- Groups track profit and cash at the end of months 1, 2, and 3.
- Groups find the first month cash goes negative, even though every month is profitable.
- Discuss two ways the business could fix its cash problem.
Check for understanding · 1 of 3
A company reports a profit this year, but its bank balance keeps falling.
Which is a likely explanation?
- ACustomers are slow to pay, so sales are recorded before cash arrives.
- BProfit always equals cash, so the bank made a mistake.
- CThe company has no expenses.
- DRevenue fell to zero.
A. Customers are slow to pay, so sales are recorded before cash arrives.
Recorded sales aren't cash until customers pay. Growing receivables and inventory can drain cash while profit looks fine.
Check for understanding · 2 of 3
Buying a new delivery van would appear in which section of the cash flow statement?
- AOperating
- BFinancing
- CInvesting
- DIt doesn't appear
C. Investing
Buying long-term assets is an investing activity. (If a loan paid for it, the loan shows up under financing.)
Check for understanding · 3 of 3
A fast-growing business is always safe from cash problems because its sales are rising.
- True
- False
False
Growth often requires spending before customers pay, which can create a cash crunch.
Remember
Key takeaways
- Profit ≠ cash.
- Cash flow: operating, investing, financing.
- Free cash flow = operating cash flow − spending on long-term assets.
- Many businesses fail from running out of cash, not from losses.
Discuss
Talk it over
- Have you ever had to pay for something before you got paid back? How did you handle it?
- What could a small business do to avoid running out of cash while growing?
Exit ticket
Explain in one sentence how a profitable business can run out of cash.
Answer on your exit ticket before you leave.
Nice work today.
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