Profitable but short of cash: understand where the money goes
Profit measures income and expenses over a period; cash tracks receipts and payments. Receivables, inventory, investment and repayments can explain the difference. Reconcile profit with cash movements, then forecast upcoming payments to understand your position.
Sales are made and your accountant reports a profit, yet you hesitate to pay a supplier or hire. The useful question is specific: which movements explain the difference between profit and available money? For owners of SMEs and startups, this distinguishes a collection delay from a margin problem or an excessive commitment.
Profit and bank cash answer different questions
A completed sale may be recognised before collection. Conversely, a deposit can arrive before revenue is recognised. Depreciation allocates an asset’s cost over its useful life; payment follows a different schedule. These mechanisms do not make profit fictional. Profit answers a different question from the bank balance.
A cash flow statement separates operating, investing and financing activities. The indirect method reconciles profit with cash by adjusting, among other things, for noncash items and timing differences. IFRS Foundation, IAS 7 overview. This framework does not mean your business must publish IFRS accounts.
Why profitable growth can put pressure on cash
Operating working capital reflects funding tied to the operating cycle. A simplified view adds inventory and customer receivables and deducts supplier payables. Bpifrance Création, working capital guidance. Depending on the business, include deposits and other operating receivables and liabilities.
Growth does not always consume cash. Large deposits or fast collections can fund part of the cycle. To measure a new order’s effect, date every payment. If a cost is paid on day 30 and the customer pays on day 60, that cost is funded for 30 days, without implying anything about the project’s other costs.
Fictional example: €40,000 profit and €20,000 less cash
This teaching example covers one period and is unrelated to any client. Net profit of €40,000 includes interest and tax. The only noncash expense is €10,000 depreciation. Operating working capital rises by €30,000, including all operating timing differences and tax balances. There are no asset sales, new loans, capital contributions or other movements.
- Net profit: €40,000.
- Add depreciation: €10,000.
- Deduct the €30,000 working capital increase. Operating cash flow is therefore €20,000.
- Deduct investment payments: €25,000.
- Deduct loan principal repaid: €10,000.
- Deduct dividends paid: €5,000. The total cash change is a decrease of €20,000.
Starting with €50,000 leaves €30,000 at the end. The complete reconciliation is 50,000 + 40,000 + 10,000 less 30,000 less 25,000 less 10,000 less 5,000 = 30,000. Profit has not mysteriously vanished: the statement explains the movements leading to closing cash.
Actual accounts also require exceptional items, currency effects and other relevant movements to be considered. Comparing two bank balances alone does not identify the cause: a new loan can hide cash consumption.
What to check before deciding
- Customers: which invoices are overdue, disputed or awaiting approval? Use plausible collection dates.
- Inventory and work in progress: which costs remain committed before a sale or invoice?
- Investment and debt: distinguish asset payments, depreciation, principal repayment and interest.
- Taxes and distributions: reconcile tax expense, instalments, outstanding balances and dividends. Do not deduct an included expense twice without addressing the related timing difference.
Turn the explanation into next steps
Build a forecast from available cash, invoices and known commitments. Thirteen weeks can be a starting horizon; adapt update frequency to pressure and data quality. Separate confirmed receipts from assumptions and test a delay on major receipts. This forecast does not guarantee three months of advance warning.
Then prioritise a measurable action: resolve an invoice dispute, negotiate a deposit, reduce unnecessary inventory or review investment timing. Supplier terms should be negotiated rather than replaced by unilateral delays. Financing options depend on the need, cost and conditions; they do not independently fix an insufficient margin.
Free cash flow requires an explicit definition. A measure of operating cash flow less investment payments is not the bank balance after repayments and dividends. Retain the detailed movements and forecast instead of making every decision from one number.
Explore assumptions on terms and inventory with the working capital calculator. To connect your situation with practical choices, see how Mercova supports a business with growing revenue and falling cash.
Key points
- Positive profit does not guarantee cash availability on a particular date.
- Growth can increase funding needs, depending on margins, deposits and actual payment timing.
- Loan principal repayment is not an expense; interest and tax can be.
- Review profit, cash movements and the cash forecast together.
Frequently asked questions
Can a profitable business be short of cash?
Yes. Receipt and payment dates, investment, repayments and distributions can reduce cash despite a profit. Reconcile all movements over the same period.
Can my accountant explain the gap?
Accounting provides the reconciliation base. Monitoring payment dates and decisions also needs current commercial, banking and operating information. Financial management organises this analysis with your accountant or Swiss accounting adviser.
Should I borrow whenever cash falls?
A fall alone is not enough to decide. Identify its cause, duration, maximum funding need and repayment capacity, then compare operating actions and possible financing.
Growing sales, but cash is still tight?
See how Mercova analyses cash timing and helps you choose actions suited to your business.
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