Profit Is Not Cash: Practical Ways to Improve Business Cash Flow

A business can be profitable and still run out of money.

That sounds contradictory until you understand the difference between profit and cash flow.

Profit measures whether your income exceeds your costs over a period.

Cash flow asks a much more immediate question:

Is the money actually in the bank when you need it?

That distinction matters.

Get your invoices out quickly

If a job is finished on Monday but you do not invoice until the end of the month, you have effectively given your customer additional credit before the payment terms even start.

Invoice promptly.

Cloud accounting can make this considerably easier by allowing invoices to be raised from a phone or computer as soon as work is completed.

Make it easy for customers to pay

Bank details should be clear.

Online payment options can also help.

Modern accounting platforms offer invoice payment links, automated reminders and real-time invoice tracking.

Chase debts

Credit control is not rude.

You have supplied the goods or service and agreed payment terms.

Having a regular process for chasing overdue invoices can make a significant difference.

Do not wait until you are short of cash before looking at the aged debtors report. 

Understand what is coming out

Cash-flow management is not simply about sales.

Look ahead at:

• PAYE

• VAT

• Corporation Tax

• Self Assessment

• Loan repayments

• Rent

• Payroll

• Insurance

• Major supplier payments

• Equipment purchases

Many cash-flow problems are predictable.

Build tax into your planning

Tax should rarely come as a complete surprise.

Accurate bookkeeping and forecasting can give you a reasonable idea of liabilities building up during the year.

Setting money aside as you go can make payment dates considerably less painful.

Review your pricing

Sometimes a cash-flow problem is actually a pricing problem.

Sales may have increased while margins have reduced.

Turnover can look impressive while the business becomes less financially healthy.

That is why looking at sales alone is dangerous.

Use a cash-flow forecast

A cash-flow forecast does not need to predict the future perfectly.

Its value is in asking:

“Based on what we currently know, what might the next few months look like?”

That gives you time to react.

One client testimonial on the Scipio website describes how understanding and managing cash flow and reporting helped navigate extremely difficult circumstances towards a successful outcome.

That is why I believe cash flow deserves much more attention than simply checking today's bank balance.

Good businesses look backwards at what happened. Strong businesses also look forwards at what could happen next.