Growth CircleWhy Your Business Can Be Profitable but Still Have Cash-Flow Problems
Why profit and cash are different, the common causes of cash shortages in profitable businesses and a checklist to fix them.
Many owners see a profit in their accounts and still struggle to pay salaries or vendors. This is common, and it does not mean the accounts are wrong.
The problem
Profit is a measure of sales and costs for a period. Cash is money actually moving in and out. The two can differ a lot.
Why it happens
- Slow customers. Sales are recorded when invoiced, but cash arrives later.
- Stock. Money spent on inventory is cash out, but not yet a cost.
- Loan repayments. The principal repaid is not an expense, but it drains cash.
- Taxes. GST, TDS and advance tax fall on fixed dates.
- Owner drawings and capital purchases. These reduce cash without reducing profit.
- Growth. Faster sales need more stock and more receivables before the cash comes back.
Practical checklist
- Prepare a monthly cash-flow statement. See how to build one.
- Review receivables ageing weekly and chase overdue invoices.
- List all tax and loan dates for the next three months.
- Check stock levels against sales and stop over-buying.
- Agree payment terms with customers and suppliers in writing.
- Forecast three months ahead, and update it monthly.
Use our cash flow calculator to test your own numbers, and read about improving working capital.
Need help with this? See our Virtual CFO or book a consultation. This article is general information, not advice for your specific situation.
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