Your business is profitable, sales are growing and the management accounts look healthy. 

So why then are cash flow concerns still keeping you awake at night?

This is one of the most common questions I hear from business owners. The good news is that being cash poor doesn’t necessarily mean that your business is failing. More often than not, it’s just that profit and cash are telling two different stories and the focus has only been on profit for a period of time.

Why profit and cash aren’t the same thing

The crux of the mismatch is due to profit being an accounting measure based on when revenue is earned rather than when cash enters or leaves the business. Cash, on the other hand, is the actual money you have in your bank account. This means that while a business can be profitable on paper, it might still be cash poor.

There can be many reasons for this, and often the cause is more than one of the following:

  • Timing difference between when you make a sale and your customer pays. As soon as you make the sale, revenue is recognised in your profit and loss account but until the money is received into your bank, you don’t have the cash to recognise the sale. 
  • You’re investing in stock ahead of anticipated growth in sales. This will show up as a cash outflow as soon as you pay for the goods but the cost of this won’t be reflected in the profit and loss until you’ve sold them.
  • Tax and VAT payments. Tax payments are calculated based on profits earned in the period but is often paid months later, and VAT payments are never reflected in the profit and loss account.
  • Loan repayments are a cash outflow but only the interest on the loan is treated as a profit and loss item.

    Whilst there is a mismatch between both, the important point is that both matter and need to be monitored. Measuring profit tells you whether your operating model is working, whilst cash tells you whether you will survive long enough to prove it.

    How to bridge the gap

    Businesses rarely fail because they become unprofitable overnight. They fail because they realise they’re running out of cash when it is too late. Understanding profit and cash is essential in getting a full picture of your business’s financial health.

    Management accounts are typically prepared monthly or quarterly to understand past performance but forward-looking cash flows are rarely produced as part of this process.

    The length of a cash flow forecast should be driven by the decisions a business needs to make. This can range from a 12-week forecast focused on short term liquidity to a 12 month or longer forecast to support investment decisions and funding discussions.

    Whilst it is impossible to predict the future with complete accuracy, this doesn’t diminish the value of forecasting. The objective is not to forecast every pound correctly, but to provide visibility of potential risks and opportunities, allowing corrective action to be taken before cash becomes a problem.

    How a Virtual Finance team can help

    If you're profitable on paper but constantly concerned about cash flow, you're not alone.

    Our virtual finance team helps business owners gain clarity over future cash requirements, build robust cash flow forecasts and make better informed decisions before cash becomes a problem.

    If you'd like a better understanding of your future cash position and have greater visibility over the next 3, 6 or 12 months, please contact Karen McBride at Karen.McBride@ct.me. or your usual CT contact as we'd be happy to have a conversation and discuss how we can support you.