Profit and cash are not the same thing. Profit is what your accounts say you earned over a period. Cash is what is actually in the bank today. The gap between the two is where most founder-led companies get caught out, and it usually gets wider as the business grows.
1. Your customers are paying you late
A sale counts as profit the day you invoice it. The cash arrives when the customer pays, which might be 30, 60 or 90 days later. If your average customer takes 60 days to pay, you are funding two months of their business out of your own pocket.
2. Growth is eating your cash: overtrading
Growing businesses pay for staff, materials and stock before the customer pays them. The faster you grow, the more cash gets tied up in that gap. Accountants call it overtrading: taking on more work than your working capital can fund. It’s why some businesses run out of cash in their best year, and why a record order book can feel like the worst month you’ve had.
3. Tax bills arrive in lumps
VAT, PAYE and corporation tax are collected throughout the year but paid on fixed dates. If that money sits in the main account, it feels like yours until the bill lands.
4. Loan repayments don’t show up as costs
Only the interest on a loan goes through your profit and loss. The capital repayments come straight out of cash, so the business can look profitable while the bank balance falls every month.
5. Big purchases hit cash all at once
A new van or machine is spread over several years in your accounts, but you pay for it on the day. One purchase can wipe out months of profit in cash terms.
6. You can’t see it coming
Most of these are predictable. The real problem is not having a forward view: a cash forecast that shows the squeeze weeks before it happens.
How to fix it
- Build a 13-week cash forecast and update it weekly. It’s the single most useful finance tool for a growing business, and the only reliable early warning for overtrading.
- Tighten payment terms and chase invoices on a set routine, not when cash gets tight.
- Move tax money aside into a separate account as you collect it.
- Plan big purchases against the forecast, and consider finance or leasing where it smooths the cash.
- Review it monthly with someone who can tell you what the numbers mean.
None of this is complicated, but it takes time and discipline, and that is exactly what most owners don’t have spare. It’s where a part-time finance partner earns their keep.
ICAEW chartered accountant and part-time finance director for founder-led UK companies.
This article is general information, not advice for your specific situation.
