You're profitable on paper. Your accounts show a decent profit. Yet somehow, come January, you're scrambling for cash. Or your summer is lean and you can't make payroll without borrowing.
This is the most common complaint we hear from growing businesses. And it's fixable, but it requires understanding what's happening to your cash.
Profit vs Cash: The Crucial Difference
Profit and cash are not the same thing. You can be profitable and still run out of cash. Here's why:
A business makes £100,000 profit. Sounds good. But profit doesn't equal cash:
- You've invoiced customers for £100,000. But they haven't paid you yet. That's £100,000 of profit with no cash.
- You bought inventory and equipment. That's cash out, but it shows as an asset on your balance sheet, not a profit hit.
- You owe tax on that £100,000 profit. But you won't pay it for 9-10 months. The cash is tied up until then.
- You've built up stock. That's cash tied up in inventory.
So you've got £100,000 of profit, but minus payment delays, inventory, equipment, and upcoming tax, you might be short on cash.
The Real Cash Flow Killers
Customer payment delays. If you invoice on 30-day terms but customers pay in 60 days, you're funding their operation. If you've got £50,000 of invoices out to customers, that's cash you don't have.
Solution: Tighten payment terms. Offer a small discount for early payment. Chase overdue invoices aggressively.
Seasonal patterns. If your business is quiet in certain months, you can't rely on monthly cash-in to match monthly expenses. Summer slowdown? Your staff still need paying, rent is still due, but revenue dips.
Solution: Build a cash buffer during good months. Plan for seasonal lean times. Use management accounts to forecast these dips.
Inventory buildup. You stock items in advance of your busy season. That's smart planning, but it ties up cash. If you've got £30,000 of stock on shelves, that's £30,000 of cash tied up.
Solution: Better inventory management. Faster stock turns. Just-in-time ordering where possible.
Equipment and capital spending. You needed a new van or equipment. That's cash out immediately, but it's capitalised as an asset rather than expensed. So profit doesn't immediately fall, but cash does.
Solution: Plan capital purchases. Budget for them. Understand the cash impact separately from the profit impact.
Upcoming tax bills. This is the killer most people don't see coming. If you made £100,000 profit last year, you'll owe roughly £25,000-30,000 in tax (depending on structure). That's cash due in 9-10 months. If you didn't set it aside, you're in trouble.
Solution: Get monthly management accounts. Work with your accountant to forecast your tax bill. Set aside cash monthly for tax.
The Cash Forecast: Your Insurance Policy
Most businesses never do a proper cash forecast. They just wait and see. That's playing Russian roulette with cash.
A simple cash forecast shows:
- Expected customer payments each month
- Expected expenses (payroll, rent, suppliers)
- Seasonal dips
- Planned capital spending
- Tax payments due
- Director drawings/dividends planned
This forecast is done monthly, 12 months forward. It shows you exactly when you'll have cash crunches, so you can plan for them.
This is what management accounts should be giving you. If your accountant isn't forecasting cash with you, ask why.
What You Need to Do Right Now
Get visibility. Pull together your bank statements for the last 12 months. Plot them month by month. Where are the cash low points?
Look at your debtors. How much have you invoiced customers that they haven't paid? If it's large, that's cash you're not seeing. Tighten payment terms or chase the debt.
Look at inventory. How much stock are you holding? Is it necessary? Could you reduce it?
Talk to your accountant. Show them your concern. Ask them to work with you on a cash forecast for the next 12 months. This is basic business planning.
Separate profit planning from cash planning. You can be profitable and still run out of cash. These are two different problems requiring two different solutions.
The Right Accountant Makes This Clear
A good accountant doesn't just give you a profit and loss statement. They give you management accounts that show cash position, forecasts, and the drivers of cash problems. They explain the difference between profit and cash, and they help you plan for cash needs.
If you're not getting this visibility from your current accountant, it's worth having the conversation. Cash flow management is fundamental to business survival.
