Your business is profitable, so why is cash still tight?

Sales are coming in. Your accounts show a profit. You’re working hard, and the business seems to be moving in the right direction.

So why does paying the wages, settling suppliers or covering the next tax bill still feel uncomfortable?

It’s a frustrating position for a business owner. You can be doing plenty of things well and still find yourself checking the bank balance more often than you would like.

Understanding where that pressure comes from is the first step towards getting more control.

A sale doesn’t always mean money in the bank

When accounts are prepared on an accruals basis, income and costs are recorded when they are earned or incurred, rather than simply when money changes hands. That means a profitable month can still leave you waiting for the cash needed to pay your bills.

Consider a simplified example, ignoring VAT and tax.

Your business completes £30,000 of work in a month, with £22,000 of associated costs. That gives you an £8,000 profit.

However, customers have paid only £15,000 by the end of the month, while all £22,000 of costs have been paid. Across those transactions, £7,000 more has left your bank account than has come in.

The work was profitable. The timing of the payments has still created a cash gap.

Growth can put more pressure on your bank balance

Winning a larger contract or taking on more customers is exciting. But fulfilling that work may mean paying for materials, additional staff or equipment before the customer pays you.

Imagine taking on a project that doubles your normal workload. Before accepting it, you need to understand more than the expected margin. When will the first supplier payment fall due? Will another payroll run happen before your customer’s first payment? What happens if their accounts team takes an extra fortnight?

These questions help you decide how to structure the work, agree payment stages and prepare for the busiest weeks.

A growing order book is encouraging. Knowing how you will fund delivery makes it much easier to enjoy that success.

Look at what is tying up your cash

A useful starting point is to look beyond the bank balance and ask where money is waiting to become available.

That might be unpaid invoices, stock sitting on shelves or work that has been completed but hasn’t yet been billed.

For a service business, an invoicing delay can be particularly easy to overlook. The team finishes a project, moves straight on to the next one and leaves the invoice until the end of the month. The customer’s payment period then starts later than it needed to.

It helps to ask practical questions:

• How quickly do we invoice after completing work?
• Are overdue invoices followed up consistently?
• Do customers have everything they need to approve payment?
• Are we carrying stock because we need it, or because we have always ordered that quantity?

Small improvements across these areas can make the collection process more predictable.

Give upcoming commitments a place in the forecast

Today’s bank balance tells you what is there now. It doesn’t tell you how much will be available after the next wages run, supplier payments and other commitments.

A rolling cash-flow forecast brings expected receipts and payments together, showing when pressure is likely to arise.

For example, a weekly view over the next 13 weeks can help you spot a difficult fortnight that would be hidden within a monthly total. The forecast should reflect when customers are realistically expected to pay, with clear assumptions where timing is uncertain.

It is also useful to try a less comfortable scenario. If your largest customer pays two weeks late, which payments become difficult? If sales fall below expectations, how much room do you have?

The purpose is to give yourself time to respond.

Make cash flow part of the regular conversation

A forecast becomes more useful when somebody keeps it current and discusses what has changed.

A short, regular review might cover the invoices due in, significant payments approaching and decisions that could affect the next few weeks. Each action should have an owner, whether that means resolving an invoice query, reviewing a stock order or speaking to a supplier.

Your accountant can help connect those day-to-day movements with the wider financial picture, making it easier to understand why cash and profit are moving differently.

Get a clearer picture of your business

You shouldn’t have to guess why a profitable business still feels stretched.

At Acconomy, we believe your financial information should help you run your business with greater confidence. Understanding what is driving cash pressure gives you a better starting point for decisions about spending, growth and the support you need.

If your accounts show a profit but your bank balance tells a different story, speak to Nigel and the Acconomy team. Let’s look at what is happening and where you could gain more control.

Related reading: Growing your business: can you afford your next big step?