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 actually 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.

That is why a genuinely profitable month can leave less in the bank than you started with, and why the balance feels like a mystery even when the accounts look healthy. Nothing has gone wrong and nobody has miscounted. The fix is not better bookkeeping — it is a rolling 13-week cash forecast plus three numbers you check every month. Both are built below, from a spreadsheet and records you already hold, in about two hours of work.

What is the real 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 — usually because it has been paid up front for work it has not yet delivered.

Owners who find this maddening are usually looking at one document. The profit and loss account is a report on the past; it was never designed to tell you what will be in the bank in eight weeks. That is a management job rather than an accounting one, and it is the ground Financial Coaching covers 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. Learn these and most of the mystery goes away.

• 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?

Here is the arithmetic laid out the way your bank statement experiences it rather than the way the accounts present it.

Now sort those items into two piles, because that is where the useful work is. The VAT, the corporation tax and the loan repayment are fixed and dated — predictable months ahead, and the only mistake available is failing to diary them. The £26,000 of debtors and the £4,000 of work in progress are the two you can genuinely influence, and they are the two most owners never look at. Pulling debtors in by a fortnight in that illustration releases around £13,000 of cash, once, and it stays won.

Why does growth make the cash gap worse?

Because 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.

That is why it is entirely possible to be profitable, expanding and three weeks from a serious problem at the same time, and why this catches out good businesses more often than bad ones. 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 whole point 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?

The most useful financial tool in a small business is a rolling weekly cash forecast. Not new software, not a finance director. 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 genuinely 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 single row is the output, and it is the only row most owners will ever need to read.

All the value sits in the negative numbers. A week where the balance dips below zero — or below whatever level makes you uncomfortable — is now a problem you can see eight weeks early. 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. On the day, the same problem is a crisis, and crises are expensive. Fifteen minutes at the end of each week putting the actuals next to the forecast keeps it honest. A forecast updated quarterly is a history exercise.

Which three numbers should you check every month?

Thirteen weeks of detail is for planning. These three are the dashboard.

• 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 is the cheapest money you will ever raise, and no lender has to approve it.
• 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, and most owners have never worked it out.

None of this needs new software. It needs ten minutes a month and a willingness to look at figures that may be uncomfortable, which is the real obstacle rather than the arithmetic. 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. Perfect is not required; started is.
• Calculate your debtor days and compare them with your stated terms. The gap is your money, financing someone else.
• Invoice on the day the work is done rather than at month end. This alone can move debtor days by two weeks.
• Chase on a schedule, not on a feeling: 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 treat going below it as an event rather than a mood.

Four questions to sit with

• 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 — and what has that number cost you this year?
• 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?

Profit keeps the score. Cash keeps the lights on. You need both, and cash is always the more urgent of the two.

If you want to see what small improvements to price, volume and margin would do to both figures, the free Profit Improvement Calculator does the arithmetic in a couple of minutes. The thinking behind all of it is set out in the Profit vs Cash mindset.