Cash
Why a business can report a profit and still feel tight on cash, the four usual causes, and how to see each one coming months ahead.
"We made a profit, so where's the money?" is one of the most common questions owners ask. The P&L says one thing, the bank says another, and both are right.
Profit is counted when the work is done and the costs are incurred. Cash moves when someone actually pays. The money goes into the gap between the two, and in most owner-led businesses that gap hides in four places.
If your terms are 14 days but the average customer pays in 45, you're funding six weeks of their business. Every month you grow, that gap grows with you. A fast-growing business can be very profitable and permanently short of cash for exactly this reason.
See it coming: look at the age of what you're owed every month, not at year end. A debtor list that's getting older is a cash problem on its way.
Time recorded but not invoiced, jobs finished but waiting on paperwork, milestones reached but not claimed. It's already in your costs, because you've paid the people who did it. But it isn't a receivable yet, let alone cash.
See it coming: reconcile what was worked to what was billed every month. Unbilled work is the cheapest cash a business can find.
Wages go out every week or fortnight. GST, PAYG and super are paid quarterly or monthly. Payroll tax, insurance renewals and tax instalments arrive as events. If the monthly numbers don't set money aside for them, each one lands as a surprise.
See it coming: a 13-week cash forecast that lists the known lumps week by week, alongside the expected receipts.
Drawings or dividends paid on the strength of a good quarter, before the receipts behind that quarter came in, leave the business funding itself on its overdraft.
See it coming: decide how much cash the business keeps before anything comes out, and only pay out what sits above it.
None of these is a surprise to the books. The information is all there in the ledger, months before it hurts. It only surprises the owner, because nobody turns it into a forward view.
General information only, not tax, legal or financial product advice. Your registered tax or BAS agent handles tax and your activity statements.
How to build a 13-week cash forecast, what goes in it, the lumps that catch owners out, and a free template to fill in.
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