Profit and available cash measure different things
Revenue and profit may be recognised before a customer pays. Salaries, VAT, suppliers and loan repayments still fall due in the meantime. Cash can also be tied up in receivables, inventory, work in progress and growth.
Four common pressure points
- Late invoicing and long customer payment terms.
- Inventory or work in progress paid for before billing.
- Growth that requires people and capacity in advance.
- Capital expenditure and repayments that reduce cash without matching the profit statement.
Use a rolling cash forecast
Maintain at least a thirteen-week forecast and update it weekly. Combine expected receipts with actual payment dates, taxes, payroll, investments and financing commitments. This creates time to act before a shortage becomes urgent.
Why profit and cash rarely move together
Profit is an accounting result: it recognises revenue when earned and costs when incurred, regardless of when money actually changes hands. Cash flow only reflects money that has physically moved. Growth widens that gap further, since a profitable business often needs to pre-fund inventory, work in progress and outstanding invoices before the corresponding cash comes in. Loan repayments, tax instalments and capital expenditure also reduce cash without appearing in the profit and loss account at all, which is why a profitable year can still end with a tighter bank position.
Frequently asked: can a profitable business still run out of cash?
Yes, and it happens more often than owners expect, especially during periods of rapid growth. A business can report a healthy profit on paper while working capital, debt repayments and investments quietly absorb all the cash generated — and then some. The earliest warning sign is usually a widening gap between reported profit and the change in the bank balance over the same period; tracking that gap monthly, rather than relying on the profit figure alone, is one of the simplest ways to catch a cash squeeze before it becomes urgent.
Profit shows whether the business model works. Cash flow shows whether the company can fund its plans.
Trace where profit remains tied up
When reported profit does not appear in the bank account, make a simple reconciliation. Start with the result and examine movements in receivables, inventory, payables, investments, loan repayments and taxes. This shows which part of profit has not yet been received or has already been reinvested.
Imagine a company that records a profitable project in March, pays the delivery team in April and receives the customer payment in June. The accounting profit exists, but the business must finance the gap for two months. Several overlapping projects can magnify the effect quickly.
Include cash in commercial terms
Payment periods, deposits, milestones and invoicing frequency are commercial choices with financial impact. Discuss them during the proposal and contract stage, not only after an invoice becomes overdue. Slightly lower revenue with stronger payment terms can be healthier than rapid growth requiring lengthy pre-financing.
Why cash conversion matters for business value
A buyer considers not only profit but also how reliably that profit becomes available cash. Strong cash conversion reduces uncertainty, supports business value and is therefore an important part of exit readiness.
Founder of Impact Growth Partner, combining finance, M&A and private-equity experience with practical financial and strategic guidance for SMEs.
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