Because profit and cash are two different measurements, and only one of them is in the bank. Profit is what the statements report after the accountant has done the arithmetic. Cash is what is left after your customers have paid you, your suppliers have been paid, the loan payments have gone out and the equipment has been bought. A business can show a healthy profit and an empty account in the same month, and it usually does so for one of four reasons.
Where the money goes
The first place is your customers. Every invoice you send and have not yet collected is money you have earned and cannot spend. If you bill a hundred thousand dollars a month and get paid in sixty days, about two hundred thousand dollars of your own money is sitting in other people’s accounts on any given day. That is you financing them.
The second is the two lines the profit statement never shows. Repaying the principal on a loan takes money out of the bank and never appears as a cost. Buying a truck, a machine or a fit-out with cash does the same. Depreciation and interest show up on the statement; the payments that actually left the account do not.
The third is stock. Fuel, parts and materials on a shelf are cash that has been turned into something you cannot pay wages with.
The fourth is growth itself. When the work pours in, wages and running costs rise the same week. The money for that work arrives months later. Growth eats cash before it makes any, and the busier the year, the worse the gap.
What it looked like in one real business
One of the people who built Summit ran a delivery and logistics company with a peak season every winter. In peak, payroll went from thirty-five thousand dollars every two weeks to a hundred and ten thousand. Everything else rose about forty percent. Over four months that was roughly nine hundred thousand dollars in wages paid out of his own pocket for work that would not be paid until March, and sometimes July if an invoice was disputed.
The statements said the company was profitable. The bank said otherwise, every winter, for years. Nothing in it was bad luck. It was arithmetic that had not been done.
Try this
Take your last twelve months of revenue and divide by 365. Multiply by the number of days your customers take to pay you. That is roughly how much of your money is out on loan to them right now. Most owners have never seen that number, and most are surprised by it.
Then do the same for the days you take to pay your suppliers, and subtract. The difference is what you are financing, every day, out of your own account.
Walk your own numbers down both paths
The Profit and Cash model takes rough figures and shows the gap between what the statements report and what lands in the bank, and what collecting sooner would release. Free, no sign-up.
More questions owners ask
- What would I free up if customers paid me 30 days sooner?
- Which part of my business should I fix first?
- Why do I keep hiring for the same job?
- What should a small business measure every week?
- Is my business growing, or just getting busier?
- How do I know if a customer is costing me money?
- Why does every decision still come back to me?