Situations
Making a profit but short of cash
Profit and cash measure different things. If your accounts show a profit but the bank balance is low, here is what to do, in order.
The short answer
1. Check for any bill with a deadline, such as a tax payment, and contact the creditor early if you cannot pay. 2. Find where the cash has gone. 3. Chase money you are owed. 4. Build a simple cash flow forecast. 5. Ask your accountant or a bookkeeper to help.
1. Deal with any deadline first
If you have a tax bill, a loan repayment or another bill due soon that you cannot pay, look at the date on it and contact whoever you owe before that date. If you have a letter from HMRC, follow what it says and use the contact details on it. We are not a tax advice service and cannot advise on what to do about a specific bill.
2. Find where the cash has gone
Profit is what you earned minus what it cost to earn it, for a period. Cash is what is in the bank. They can move apart for several reasons:
| Reason | What happens |
|---|---|
| Customers pay late | A sale counts towards profit when you invoice it, but the cash arrives only when the customer pays. |
| Stock | Money spent on stock leaves the bank before the goods are sold. |
| VAT and tax bills | VAT you charge customers has to be paid over to HMRC, and tax on profits is paid after the period ends. If that money has been spent, the bill can be hard to meet. |
| Loan repayments | Repaying the amount borrowed takes cash but does not reduce profit. Only the interest counts as a cost. |
| Equipment | A large purchase leaves the bank at once, but its cost is spread across several years in the accounts. |
| Growth | Taking on more work can mean paying for staff and materials before customers pay you. |
| Owner drawings or dividends | Money you take out of the business reduces cash. |
Compare your bank statements over the last few months with your profit for the same period. The gap may sit in one or two of these rows.
3. Chase money you are owed
List who owes you money and how late each payment is. Send invoices promptly, state your payment terms on them, and chase on the day a payment becomes late. Keeping on top of this is called credit control. Some businesses ask a bookkeeper to do it.
4. Build a cash flow forecast
A cash flow forecast lists the money you expect to come in and go out, week by week or month by month, for the coming months. It shows when the bank balance may run low, so you can act before it does: chase a customer, delay a purchase, or plan for a tax bill. A spreadsheet is enough to start.
5. Ask for help
Your accountant can help explain why your profit and cash differ and may be able to build a forecast with you. A bookkeeper can keep your records and chasing up to date. If this keeps happening, regular management accounts can show the problem earlier. Ask your accountant:
- Can you show me where the cash has gone over the last few months?
- Can you build a cash flow forecast with me and update it?
- When are my next VAT and tax payments due, and how much might they be?