Why profit and cash are not the same.

Profit and cash are not the same thing because they measure two different events. Profit is what you earned less what it cost you over a period, counted when the work was done and the invoice was raised — whether or not a penny has moved. Cash is what has arrived in, and left, your bank account. The gap between them is partly timing, and partly a short list of payments that never appear in a profit and loss account at all: money your customers owe you, the capital element of loan repayments, VAT and corporation tax, and the money you take out as drawings or dividends.

So a profitable month can leave less in the bank than you started with. A rolling 13-week cash forecast and three monthly numbers show this in advance, built from a spreadsheet and records you already hold in about two hours.

What is the difference between profit and cash?

Profit answers the question “did the trading work?” It matches income to the cost of earning it, in the period the work happened. Raise a £10,000 invoice in March for work you did in March and March earned £10,000 of revenue, even if the money lands in May.

Cash answers a different and more urgent question: “can I pay everyone on Friday?” It counts only money that has moved. Both are true at the same time. A business can be profitable and unable to make payroll, and it can be loss-making and comfortable for a while — often because it has been paid up front for work it has not yet delivered.

The profit and loss account reports the past, so it cannot tell you what will be in the bank in eight weeks. Forecasting is a management job, and Financial Coaching covers it session by session.

What never shows up in your profit figure?

Four things take cash out without ever appearing as a cost in your profit and loss.

• Money owed to you. An invoice raised is revenue today and cash in 30, 45 or 60 days. Until it is paid you are funding your customer’s business out of your own bank account.
• Capital repayments on loans and finance. Only the interest is a cost in the profit and loss. The capital element leaves the bank every month and appears nowhere in your profit.
• Tax payments. VAT is collected on HMRC’s behalf and never was your money, though it sits in your account until the quarter falls due. Corporation tax is normally payable nine months and a day after the year end, so a strong year produces a large payment long after the profit was recorded.
• Drawings and dividends. Money taken out by the owners sits below the profit line and is invisible in the profit figure.

Add stock and work in progress and you have the full picture. Both are cash you have already spent, sitting on the balance sheet as an asset rather than in the profit and loss as a cost.

How can a profitable month cost you £53,000?

This is the arithmetic as your bank statement sees it.

Sort those items into two piles. The VAT, the corporation tax and the loan repayment are fixed and dated, so put them in the diary months ahead. The £26,000 of debtors and the £4,000 of work in progress are the two you can influence. Pulling debtors in by a fortnight in that illustration releases around £13,000 of cash, once.

Why does growth make the cash gap worse?

Growth is funded before it pays. More people, more stock, more capacity and more work in progress all consume cash ahead of the revenue they create. Double the sales and you roughly double the money tied up in unpaid invoices at any one moment — so the better the quarter, the tighter the bank account.

A business can be profitable, expanding and three weeks from a serious problem at the same time. If growth is the current agenda, the cash consequences of the plan belong inside the plan. It is a standing item in Business Coaching, and it is the subject of the Cash Conversion Cycle model: how long you wait between paying for something and being paid for it.

How do you build a 13-week cash forecast?

Use a spreadsheet with a column for each of the next 13 weeks and three blocks of rows.

1. Money in, by week. Take your unpaid sales invoices and put each one in the week you expect it to be paid, not the week it is due. If a client habitually pays at 60 days when your terms say 30, forecast 60. Then add standing income, deposits, refunds and anything else you expect.
2. Money out, by week. Payroll, PAYE, rent, suppliers, subscriptions, VAT, corporation tax, loan repayments, drawings. Take the dated items from the diary and the recurring ones from your bank statement rather than from memory, because memory reliably understates them.
3. Closing balance. Opening balance, plus money in, less money out, carried into the next week. That row is the output.

Look for weeks where the balance dips below zero, or below the level you are comfortable with. Eight weeks out, you can chase a specific invoice, ask a client for a stage payment, move a purchase by a fortnight or arrange a facility calmly. Spend fifteen minutes at the end of each week putting the actuals next to the forecast.

Which three numbers should you check every month?

Check these three numbers every month.

• Debtor days. Outstanding sales invoices divided by annual sales, multiplied by 365. If your terms are 30 days and the answer is 58, roughly a month of sales is sitting with your clients rather than with you. Closing that gap releases cash without borrowing.
• The closing balance in week 13. One number, straight off the forecast. If it is lower than this month’s balance, find out why now rather than in ten weeks’ time.
• Cash cover. Bank balance divided by monthly fixed costs. It tells you how long the business survives if income stops.

This takes ten minutes a month. If the six core figures underneath them are unfamiliar territory, start with understanding your numbers and come back to this.

What to do this week

• Build the 13-week forecast. A spreadsheet is fine.
• Calculate your debtor days and compare them with your stated terms.
• Invoice on the day the work is done rather than at month end.
• Chase on a schedule: a named person, a fixed day each week, an agreed escalation point.
• Take deposits or stage payments on anything large or long-running.
• Put 14-day terms on new clients. Existing clients are a harder conversation; new ones cost nothing to change.
• Check you are not paying suppliers early out of habit while chasing your own money.
• Diary every tax date with the amount against it as soon as the amount is known.
• Set a cash buffer target in weeks of fixed costs, and act when the balance goes below it.

Four questions to answer

• Do you know what your bank balance will be in eight weeks, and within what margin?
• Out of ten, how comfortable are you chasing a client who is 30 days late
• If your largest client paid 30 days later than usual, would the business be fine?
• How much cash is sitting right now inside work you have done and not yet invoiced?

The free Profit Improvement Calculator shows what small improvements to price, volume and margin would do to both figures. The thinking behind all of it is set out in the Profit vs Cash mindset.