Cash Flow vs. Profit: Why Growing Businesses Still Run Short of Money

It is one of the most confusing moments for a business owner: the accounts show a healthy profit, yet there is not enough money in the bank to pay suppliers or run payroll. How can a profitable business run short of cash? The answer lies in the difference between profit and cash flow.

Profit and cash flow are not the same thing

Profit is what is left when you subtract expenses from revenue over a period of time. Cash flow is the actual movement of money into and out of your bank account. A sale can count towards profit the day you invoice it, even if the customer pays you 60 days later. Meanwhile, your own bills keep arriving on time.

Why growing businesses feel the squeeze

• Slow-paying customers. The more you sell on credit, the more cash is tied up in unpaid invoices.
• Inventory and materials. Growth often means buying stock or materials long before you can sell the finished product.
• Investing ahead of revenue. New hires, equipment and marketing need paying for before they generate income.
• Loan repayments and taxes. These reduce your cash but don’t appear as ordinary expenses in the same way.

Fast growth can consume cash faster than it creates it — which is why profitable businesses can still run into trouble.

Six ways to protect your cash flow

1. Forecast 13 weeks ahead. A simple weekly forecast of money in and money out shows shortfalls early, while there is still time to act.
2. Invoice promptly and follow up. Send invoices as soon as work is done and have a clear process for reminders.
3. Agree better payment terms. Ask for deposits on large jobs and negotiate longer terms with key suppliers.
4. Keep an eye on stock levels. Slow-moving inventory is cash sitting on a shelf.
5. Plan for taxes. Set aside money for tax payments throughout the year instead of scrambling at the deadline.
6. Build a cash buffer. Aim to hold enough cash to cover at least a few weeks of essential costs.

Make cash flow part of your monthly routine

Reviewing a profit and loss statement is important, but it only tells half the story. Add a cash-flow report and a short forecast to your monthly review, and you will spot problems weeks before they become emergencies.

If your numbers feel hard to read, or you want a forecasting system that is easy to keep up to date, the Vizvex finance team can help you set one up.