How Can a Profitable Business Run Out of Cash?
Here's a statement that sounds impossible:
A profitable business can run out of cash.
Yet understanding the difference between profit and cash flow is extremely important for business owners.
Your profit and loss statement may show that you're making money.
Your bank account can tell a very different story.
Profit and Cash Aren't the Same Thing
Imagine completing $100,000 worth of work this month.
You've earned revenue.
But what if your customers don't pay those invoices for 30, 60 or 90 days?
Your employees still need to be paid.
Your vendors still expect payment.
Rent is still due.
Insurance still needs to be paid.
There's now a timing difference between earning revenue and receiving cash.
Growth Can Consume Cash
Growth can make this even more challenging.
Suppose your company wins a major new contract.
Great news.
But fulfilling the contract requires hiring five people, buying equipment and purchasing materials before your customer pays you.
The business may be growing rapidly while simultaneously experiencing pressure on cash.
Other Uses of Cash
Money can also leave the company through activities that don't always line up neatly with what an owner expects to see when thinking about profit.
Examples can include:
Debt payments
Equipment purchases
Inventory
Owner distributions
Tax obligations
Large vendor payments
Capital investments
This is why simply asking, “Did we make a profit?” isn't enough.
Understand How Money Moves Through Your Business
Business owners need visibility into both profitability and cash flow.
Ask:
How quickly are customers paying?
How much do we owe vendors?
What major expenses are approaching?
How much cash does the company typically need?
Are there predictable seasonal changes?
What happens to cash if sales grow substantially?
Better Bookkeeping Creates Better Visibility
Maintaining accurate financial records gives you the information needed to understand these issues.
At SBC Bookkeeping & Consulting, our Bookkeeping & Consulting approach goes beyond maintaining transactions.
We help business owners build accurate financial records, receive consistent reporting and gain access to experienced consultants when additional financial analysis is needed.
Profitability matters.
Cash flow matters.
And understanding the difference can help you make better business decisions.
Don't wait until the bank balance creates a crisis.
Know what's happening with your money before it becomes a problem.