It's one of the most disorienting things a growing business can experience: the P&L says you made money, but the bank balance says otherwise. Here's why that happens, and what to do about it.
It's an old accountant's line, but it holds up. Profit is calculated — it includes sales you've invoiced but not yet been paid for, and it spreads costs like equipment or prepayments over time rather than when the cash actually left the business. Cash, by contrast, is simply what's in the bank. A business can be genuinely, legitimately profitable on paper and still be short of cash to pay this month's wages, because the timing of when profit is earned and when cash actually moves rarely match up.
This is the part that catches people out: cash problems get worse, not better, as a profitable business grows. More sales usually means more stock bought in advance, more people paid before the related revenue lands, and more debtors — customers who owe you money but haven't paid yet. Every one of those ties up cash before the sale ever turns into money in the bank. A business growing 30% a year can be more cash-constrained than one standing still, purely because of that timing gap.
Working capital is the usual culprit: stock, debtors and creditors — the money tied up between paying for something and getting paid for it. Most cash flow surprises trace back to a change in one of these three.
Debtor days — how long customers take to pay — is usually the biggest lever, and often the most neglected. Creditor days — how long you take to pay suppliers — is the second, though it needs managing carefully so it doesn't damage supplier relationships. Stock — how much cash is sitting on shelves rather than in the bank — is the third, and it's the one growing businesses most often let drift upward without noticing. Small, deliberate moves on all three compound quickly.
None of this is really about spotting problems after they happen — it's about seeing them coming. A rolling 13-week cash flow forecast, kept genuinely up to date rather than built once and forgotten, turns "why is the bank balance lower than I expected" into "we knew this dip was coming in week seven, and here's what we're doing about it." That's the difference between managing cash and being managed by it.
In practice: a forecast that's updated weekly against actuals, not built once a quarter; clear ownership of chasing overdue invoices rather than hoping they resolve themselves; stock and purchasing decisions made with cash impact in mind, not just sales forecasts; and a habit of asking "what does this decision do to cash," not just "is this decision profitable," before anything significant gets signed off.
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