Ask an owner-manager how the business is doing and they will usually quote the profit figure. It is the number in the annual accounts, the one the bank asked about, the one that decides how much tax is due. It is also the number that tells you almost nothing about whether you can pay next Friday's wages.
Profit measures performance over a period. Cash measures what you can spend on a particular day. They are related, but they are not the same thing, and the space between them is where plenty of otherwise sensible UK businesses come unstuck.
Profit and cash answer different questions
Profit is an accounting measure. It takes the income you earned in a period and subtracts the costs you incurred earning it, whether or not any money has actually moved. Under accruals accounting, an invoice raised in March counts as March income even if the customer pays in June. A supplier bill for March work is a March cost even if you settle it in April.
Cash is simpler and less forgiving. It is the money sitting in your bank account once the payments have cleared. You cannot pay a supplier, a landlord or HMRC with an unpaid sales invoice.
A quick illustration. A building firm completes a £40,000 job in one month. Materials cost £15,000, subcontractors £12,000, and the customer has 60 days to pay. On paper the job produced £13,000 of profit. In the bank, the firm is £27,000 down and waiting. Start two more jobs of that size before the first invoice is paid and a healthy order book can empty the account.
Where the gap opens up
Four things usually explain the difference between a profit figure and a bank balance:
- Money owed to you. Sales you have invoiced but not collected sit in the profit figure and nowhere near your bank account. The longer your customers take to pay, the wider the gap.
- Stock and work in progress. Materials bought for a job, or a project that is half finished, have consumed cash without generating an invoice yet.
- Money you owe. Supplier credit flatters cash flow temporarily. When those terms tighten or a payment run falls due, the cash leaves in a lump.
- Items that move cash but not profit. Loan capital repayments, VAT, PAYE, corporation tax, equipment purchases and owner's drawings all leave the account. Not all of them appear as an expense in the profit and loss account.
The traps that catch healthy businesses
Growth that eats cash
Overtrading is the classic failure. Turnover rises, margins look fine, but every new order requires you to buy materials and pay staff before the customer pays you. The faster you grow, the more cash is tied up. A business doubling its sales can run out of money while its profit and loss account looks better than ever.
Tax and VAT timing
VAT collected on sales is not your money, but it sits in the account until the quarterly return is due. PAYE and corporation tax arrive in similar lumps. A profitable quarter followed by a large VAT bill and a payment on account can wipe out a month's headroom in a single week.
Seasonality and one-off costs
Plenty of UK businesses earn most of their revenue in a few months and then run lean. Annual insurance, software renewals, quarterly rent and licence fees often land in the quiet period, exactly when the balance is lowest.
One customer, one payment run
If a single client represents a large share of your turnover, their payment habits become your cash flow. A change of finance director, a disputed invoice or a quiet month on their side can delay your money by weeks.
Building a forecast you will actually use
A 13-week rolling cash flow forecast is the standard tool, and it does not need to be complicated. A spreadsheet with one column per week will do. Here is how to make it realistic rather than optimistic:
- Start with today's cleared bank balance. Not last month's, and not the balance including cheques you have written but that have not yet cleared.
- Enter receipts on the date you expect the money, not the invoice date. Base it on how each customer has actually behaved, then add a little slack for the slow ones.
- Enter payments on the date they leave the account. Include VAT, PAYE, corporation tax, loan repayments, rent, insurance, subscriptions, equipment and your own drawings.
- Set a minimum balance. Choose the cushion you are not willing to drop below, then watch the lowest point in the forecast rather than the closing figure.
- Update it weekly and reforecast monthly. A forecast is a working document. Ten minutes each Friday beats a full rebuild every quarter.
- Plan the fix before you need it. Chase debtors, ask for stage payments or deposits, agree longer terms with a supplier, delay non-essential spending, or arrange an overdraft or invoice finance while your figures still look strong.
Warning signs worth acting on
The earliest signals are rarely dramatic. Watch for debtor days creeping upwards, a bank balance that only clears its overdraft for a day or two each month, payroll funded from money set aside for VAT, or suppliers being paid later than agreed to cover wages. If you find yourself checking the bank before signing off routine spending, the forecast needs attention now, not at year end.
Keeping cash and profit in step
Good cash discipline is mostly habit. Invoice the day the work is done, with the right purchase order number on it, because errors are the most common reason invoices go unpaid. Chase at 7, 14 and 30 days rather than waiting a polite month. Ask for deposits on larger jobs and take card or instant payments where you can. Run supplier payments on set days so you can see the effect on the balance, and move tax money into a separate account as it accumulates.
Keep drawings on a predictable schedule rather than dipping in when the balance looks healthy, and reconcile the bank account weekly so you always know your true position. Then compare the two numbers that matter: profit for the period, and cash at the end of it. When they diverge, understand why before you commit to the next big order.
If tax, finance or restructuring decisions are involved, take advice from a qualified accountant or adviser who can look at your specific circumstances before you act.
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