Tha’s making a profit. So where’s t’brass?Profitable, but short of cash? Here’s why.Why a profitable business can still run short of cash

It’s one of the things I hear most often from business owners: “The accounts say we made a profit, so why is the bank balance so low?” It’s a fair question, and the answer usually has nothing to do with doing anything wrong. Profit and cash simply measure different things.

Profit measures performance. Cash measures survival.

Your profit and loss account records income when you earn it and costs when you incur them. Your bank account records money when it actually moves. Most of the time those two things happen at different moments, and the gap between them is where cash problems start.

Six common reasons profit and cash part company

1. Customers pay later than you think. An invoice raised in March counts towards March’s profit, but if the customer pays in May, the cash isn’t there in March or April. Payment terms say one thing; how customers actually pay often says another.
2. Stock ties up money. Buying stock takes cash out of the bank straight away, but it only becomes a cost in your profit and loss when it’s sold.
3. VAT isn’t yours. If you’re VAT registered, the VAT on your sales sits in your bank account for a while, but it belongs to HMRC. Treat it as spendable and the quarter-end bill will hurt.
4. Loan repayments don’t appear in profit. Only the interest goes through your profit and loss. The capital you repay still leaves the bank every month.
5. Equipment and vehicles are spread out. A new van is paid for up front or through finance, but only a slice of its cost (depreciation) hits profit each year.
6. Growth eats cash. Winning more work usually means paying for staff, materials and stock before your customers pay you. The faster you grow, the more cash that gap can swallow.

Tax bills land long after the profit

Corporation Tax is a good example of timing working against you. For most small companies it’s due nine months and one day after the end of the accounting period. A strong year can leave a large bill arriving just as trading has slowed. If it isn’t in the plan, it becomes a surprise.

A profitable business can still run out of cash. A fast-growing, profitable business is often more at risk than a steady one.

What to do about it

• Look forward, not just back. Your annual accounts tell you what happened. A cashflow forecast tells you what’s coming.
• Forecast how customers really pay. Use their actual payment behaviour, not just the terms on the invoice.
• Know your low point. The most useful number in any forecast is the lowest balance you’ll hit, and when.
• Put the big dates in. Payroll, VAT, PAYE, Corporation Tax, loan repayments and annual bills.
• Compare forecast with actual. Each month, check where reality differed and why. That’s how a forecast becomes more reliable over time.

None of this needs to be complicated. A simple 13-week cashflow forecast is often enough to turn “where’s the money gone?” into “we’ll be tight in week seven, so let’s chase those two invoices now.”