Cashflow
Why it matters
Profit is an accounting result and cash is what pays wages. A profitable, growing business can still fail if customers pay late and bills are due now. Growth often makes the problem worse, because delivering more work means paying for it before the money arrives. A business with a loss can survive for a long time if the timing of cash works in its favour.
How to apply it
- Track cash in and cash out weekly, separately from the profit and loss statement.
- Build a rolling forecast of the next thirteen weeks or so, and update it every week.
- Chase invoices before they are overdue. Late payment is the most common cause of a gap.
- Match payment terms with suppliers to the terms given to customers, so money is not owed out before it is owed in.
- Ask for deposits or part payment upfront on larger projects.
- Keep a buffer for naturally slow months and for tax bills.
What it is
Cashflow tracks real money. Cash in comes from customer payments and funding. Cash out goes to salaries, suppliers, tax and loan repayments. Net cashflow is the difference over a period. It differs from profit, which counts a sale when it is invoiced and a cost when it is incurred.
That gap is where businesses get caught. Say an agency invoices 30,000 euros in March but the client pays after 60 days, while 20,000 euros of salaries and bills fall due at the end of March. The profit and loss statement shows a healthy profit. The bank balance shows 20,000 euros less.
Common mistakes
- Treating profit as proof of cash.
- Reading a high bank balance without subtracting VAT and tax owed.
- Forecasting sales but not the dates the payments will arrive.
