Profit is not cash
A business can be profitable on every single job, with a full order book and a growing turnover, and still fail to make payroll in March.
That is not a paradox and it is not bad management. Profit is what you earned. Cash is what is in the account on the day somebody needs paying. Between the two sits timing, and timing is where businesses die.
The sequence that does it
- Week one: you buy the materials.
- Week five: you pay for them, on your supplier's thirty day terms.
- Week nine: you finish and invoice.
- Week seventeen: your customer pays, on sixty day terms, eventually.
For twelve weeks you funded that job out of your own account. The job was profitable throughout. None of that helped in week six.
Why growing makes it worse, not better
This catches good businesses, because everything visible is going the right way.
Every new job has to be paid for before it pays you. Grow twenty per cent and you are funding twenty per cent more materials, wages and fuel out of an account that has not yet received a penny of the extra sales. The gap does not stay the same size while you grow, it grows with you.
So the faster you grow, the more cash the growth consumes. Turnover is up, profit is up, everybody is busy, and the balance is going down. It looks like success right up until the moment it does not, and this forecast is the only place you would have seen it coming.
Watch the low point, not the closing balance
Almost every cash flow template ends with a closing balance and buries the trough somewhere in the middle of a wide table. That is exactly backwards.
A forecast that finishes the year at plus £20,000 having dipped to minus £8,000 in month seven is not a forecast of a good year. It is a forecast of a business that did not reach month eight. The closing balance describes a future that the trough prevents from happening.
The low point and the month it lands in are at the top of this page for that reason.
Two numbers worth being honest about
Debtor days. Put in what customers actually take, not what your invoice says. If your terms are thirty days and everybody pays at fifty-five, the forecast built on thirty is wrong by twenty-five days of turnover, and it is wrong in the direction that hurts.
The gap between debtor and creditor days. Pay in thirty, get paid in sixty, and you are lending your customers thirty days of money on every job at no interest. Closing that from either end is worth more than almost anything else you can do: a week off your debtor days and a week added to your creditor days both land directly in the trough.
The VAT in your account is not yours
It arrives with every invoice you raise, sits there making the balance look healthier than it is, and leaves on the quarter.
A business that feels comfortable for two months and then panics in the third is very often just watching a VAT cycle without recognising it. If the quarterly bill is the thing that pushes you into the red, the uncomfortable truth is that the money was never available to spend.
What to do about a bad month
Every option is cheaper and easier arranged before the month than during it.
An overdraft agreed while you still look solvent. Shorter payment terms, or a deposit on larger jobs. Asking a supplier for longer, which they will usually consider for a customer who asks in advance and never for one who simply pays late. Or slowing the growth on purpose, which feels like failure and is occasionally the most profitable decision available.
Arranging finance in the month you need it is the most expensive time to do it, and everybody you ask can tell.
Common questions
Why is my business profitable but always short of money?
Because profit and cash are separated by timing. Profit is what you earned on the work. Cash is what is in the account on the day somebody needs paying. You buy materials in week one, pay for them on your supplier's terms, and get paid on your customer's terms weeks later. Every job opens that gap, and a business can be profitable on all of them while the account empties.
Why does growing make it worse?
Because every new job needs paying for before it pays you. Grow twenty per cent and you are funding twenty per cent more materials, wages and fuel out of an account that has not received the extra sales yet. The faster you grow, the more cash the growth consumes, and it looks like everything is going well right up until it does not. That is why fast-growing profitable businesses run out of money.
What number should I actually watch?
The low point, not the closing balance. A forecast that ends the year at plus twenty thousand having dipped to minus eight in month seven is a description of a business that did not reach month eight. Almost every cash flow template shows you the closing figure and buries the trough, which is exactly backwards. This page puts the low point and the month it happens at the top.
What are debtor days and why do they matter so much?
The number of days your customers take to pay, which is usually not the number printed on your invoice. Put the real figure in: the gap between the two is a common reason forecasts turn out wrong, and wrong in the direction that hurts. If you pay suppliers in thirty days and get paid in sixty, you are lending your customers thirty days of money on every job, for free.
Should I include VAT in a cash flow?
Yes, because it moves through your account even though it is not yours. It arrives with every invoice, flatters the balance for up to three months, and leaves on the quarter. A business that feels comfortable for two months and panics in the third is usually just watching a VAT cycle. If the quarter bill is what pushes you into the red, that money was never available to spend.
My forecast dips just below zero. Is that a disaster?
Treat it as a warning rather than a verdict. This models whole months, and money does not arrive on the first and leave on the last. A forecast that dips slightly below zero mid-month may be perfectly survivable, and one that stays slightly above may not be. What matters is that you now know which month is tight, which is the thing you can act on.
What do I do about a month that goes negative?
All of the options are easier arranged before the month than during it. An overdraft agreed while you look solvent. Shorter invoice terms, or a deposit on larger jobs. Asking a supplier for longer. Or slowing the growth deliberately, which sounds like failure and is sometimes the right call. Arranging finance in the month you need it is the most expensive time to do it.