Profit vs cash flow

Your Business Is Profitable. So Why Are You Always Short on Cash?

Your accountant says you made money. Your bank account didn't get the memo. Here's where the cash went, and how to get some of it back.

You close out the month, open the P&L, and there it is: a profit. Nice. Then payroll week shows up, you log into the bank, and the balance looks like it lost a fight.

Profitable on paper but no cash in the bank? That doesn't make you bad at business. You've run into the most common mix-up in small business finance: profit and cash flow are two different numbers.

Profit is what you earned on paper. Cash is what you can actually spend on Friday. In a growing business the two drift apart, and the missing money almost always turns up in the same five places.

An example business: profit climbed to $63,000 in six months while the bank balance dropped by $22,000. Nothing was broken. The money just moved somewhere less convenient.

1. It's in your customers' pockets

Most P&Ls count a sale the day you send the invoice. The customer, meanwhile, pays whenever they get around to it: 30 days, 45, sometimes 60.

Here's the annoying part. The better sales go, the more money piles up in unpaid invoices, so a record quarter can leave you with less cash than a slow one.

The fix: Send the invoice the day the job wraps, not at month end. Take a deposit on bigger jobs. Put a pay-now link right on the invoice so paying you is the easiest thing on their desk, and follow up on day one of late instead of day thirty.

2. It's sitting on your shelves

Inventory is cash wearing a disguise. Every box in the back room is money you already spent and haven't gotten back yet.

That bulk discount felt great at the time. It only pays off if the stuff actually sells.

The fix: Pull a list of anything that hasn't sold in 90 days and stop reordering it. Base reorders on what sold last month, not on what the sales rep is excited about, and ask suppliers for smaller, more frequent deliveries.

3. It's stuck in the gap

Put the first two together and you get the cash gap. You pay for materials and payroll up front, your customer pays you weeks later, and your bank account quietly covers the difference in the meantime.

The fix: Squeeze the gap from both ends. Get paid sooner with the steps above, and stop paying suppliers early out of habit. If they give you 30 days, use them. If they don't, ask.

4. It left through doors your P&L doesn't show

Some of the biggest checks you write don't count as expenses, so they never dent your reported profit. Your bank account notices them just fine.

Loan principal. Only the interest shows up as an expense. The principal still leaves your account every month.

Equipment you paid for in cash. Your accountant spreads the cost over several years. Your bank account paid it all on one very memorable day.

Owner draws. The money you take home isn't an expense either, but it's about as real as cash gets.

The fix: Once a month, list every dollar that left the account, not just the expenses on the P&L. That list is what it really costs to run your business.

5. It went to taxes on money you haven't seen

You owe tax on profit even when that profit is still sitting in unpaid invoices or on a shelf. And estimated tax payments have a real talent for landing in your slowest week.

The fix: Open a separate account just for taxes and move a set percentage of every deposit into it as it lands. Your accountant can tell you what that percentage should be.

How small cash flow problems add up

None of these is a big deal on its own. Stacked together, they can eat all of your profit and then some, without anybody doing anything wrong.

Same example business: $63,000 of profit, and the bank balance still went down $22,000.

Your 15-minute monthly checkup

At the end of each month, grab three numbers (or ask your bookkeeper for them):

What customers owe you, and how much of it is past due.

What your inventory is worth compared with last month.

Cash at month end, right next to profit for the month.

If profit went up and cash went down, one of the five culprits above did it. At least now you know where to look.

When the gap is just growing pains

Sometimes the business is healthy and the timing is simply off. A big contract, a busy season or a second location can stretch the gap for a few months.

That's when outside working capital can make sense, as long as it's planned ahead, sized to the gap and paid back from the revenue the growth brings in. A bridge you choose on purpose is a very different thing from a rescue you need on a Thursday night.