Profit is recorded when you do the work, cash is what actually lands in the bank. The gap between the two, debtors, stock, tax owed, drawings, big purchases, is where most cashflow stress lives. Look at profit, cash and tax together every month and the surprises stop.
Key takeaways
- Profit is an opinion based on when work is done; cash is the actual money in your account today.
- Most missing cash is sitting in unpaid invoices, stock, unposted tax, drawings, or recent capital purchases.
- Treat VAT, PAYE and corporation tax as money that was never yours; a separate tax account is one of the simplest cashflow controls a business can put in place.
- Review profit, cash and tax together every month and you'll see a squeeze coming weeks before it bites.
You have just seen your year-end accounts. They show a healthy profit. You should feel good. Instead you are looking at your bank balance wondering where that money actually is. This is why year-end accounts alone are not enough to run your business from.
If that sounds familiar, you are not imagining it, and you are not doing anything wrong. Profit and cash are two different things. A business can be genuinely profitable and still struggle to pay its bills. Once you understand why, the problem stops being a mystery and starts being something you can manage.
Profit is an opinion. Cash is a fact.
Profit is what is left after you take your sales and subtract your costs, on paper, over a period of time. Cash is the actual money sitting in your account on any given day.
They sound like they should be the same. They are not, because profit is recorded when you do the work, not when the money lands. You can invoice £50,000 in March, book it as income, and show a profit for the month, while the customer does not pay you until June. On paper, a great month. In the bank, nothing yet.
That gap between when you earn money and when you actually receive it is where most cashflow stress lives.
Where the cash quietly disappears
When profit looks fine but cash is tight, the money is usually tied up in one of a few places. None of them show up clearly on a simple profit and loss statement, which is why owners get caught out.
Money owed to you. Every unpaid invoice is profit you have earned but cannot spend. The bigger your debtor list, the more of your profit is sitting in other people's bank accounts.
Stock and work in progress. If you hold stock, or you are part way through jobs you have not invoiced yet, your cash is sitting on shelves or on site. It is value, but you cannot pay wages with it.
Tax you have not set aside. Corporation tax, VAT and PAYE are not your money. They flow through your account and feel like cash, right up until the bill arrives. Many profitable businesses are really just holding HMRC's money for a while.
Money you have taken out. Dividends, drawings and loan repayments come out of cash but do not appear as costs in your profit. So your profit can look strong while your bank balance shrinks.
Buying things that last. Equipment, vehicles and fit-outs are paid for in cash now but only charged against profit slowly, over years. A big purchase can empty the account without denting the reported profit.
Put those together and you can see how a profitable business ends up short. The profit is real. It is just not in a form you can spend yet.
The simple way to see what is really happening
You do not need a finance degree to get on top of this. You need three numbers, looked at together, regularly.
The first is your profit, so you know the business model works. The second is your cash position, so you know what you can actually spend. The third is your tax, so you know how much of that cash is not really yours.
Most business owners only ever see the first one, and only once a year. That is the root of the problem. By the time the accounts arrive, the decisions they would have informed have already been made.
When you look at profit, cash and tax together, every month, the picture changes. You stop being surprised. You can see a squeeze coming weeks before it arrives, while you still have time to do something about it.
What to do about it
Here is where to start.
Get your invoicing and collection tight. The fastest way to free up cash is to get paid faster. Invoice the day the work is done, not the end of the month. Make your payment terms clear. Chase politely but promptly. Cash you are owed is the easiest cash to find.
Set tax aside as it builds. Treat VAT and tax as money that was never yours. Move it to a separate account as it accrues. The bill stops being a shock because the money is already waiting.
Forecast your cash, not just your profit. A simple rolling forecast of money in and money out over the next few months tells you far more about whether you can afford that hire or that purchase than any profit figure.
Understand the timing of big decisions. Before you buy the van, take the dividend or take on the big job that needs funding up front, look at what it does to your cash, not just your profit.
None of this is complicated. It just needs the right numbers, in front of you, at the right time.
The bottom line
A profit on paper is good news. It means the business works. But profit is not the same as money in the bank, and treating them as the same is what catches good businesses out.
When you can see profit, cash and tax clearly and together, the fog lifts. You know what you can spend, what to set aside, and what each decision will really do. That is the difference between hoping the cash holds out and knowing it will.
If your numbers only show up once a year and never quite explain where the cash went, that is exactly the problem we fix. We turn your figures into a clear monthly picture, so you always know how your business is really doing.
Book a free clarity call and let's look at where your cash is going.