A Profitable Business Can Still Run Out of Cash
A business can be profitable on paper and still struggle to pay its bills.
Profit and cash are two different things.
For growing SMEs in Gorey, Wexford and across Leinster, understanding that distinction is fundamental to good financial management.
Why doesn’t profit equal cash?
Consider a business that completes €100,000 of profitable work this month.
The sales may appear in the management accounts immediately.
However, if customers have 60-day payment terms, the business might not receive the cash for another two months.
During that period, the business still needs to pay:
employees;
suppliers;
VAT;
PAYE and PRSI;
rent;
insurance;
loan repayments; and
other overheads.
The business can therefore report a healthy accounting profit while its bank balance becomes increasingly stretched.
Growth can create cash pressure
Counter-intuitively, rapidly growing businesses can be particularly exposed.
Growth may require additional stock, more employees, larger supplier orders or investment in equipment.
Those costs often need to be paid before the additional customer receipts arrive.
This creates a working-capital requirement.
The faster the business grows, the more cash it may need to finance that growth.
Monitor debtor days
Slow-paying customers are another major factor.
If a business increases its turnover but customers begin paying in 60 days rather than 30, considerably more money becomes tied up in trade debtors.
Monitoring debtor days gives business owners an early indication of whether cash is becoming locked up in unpaid invoices.
Good credit-control procedures can therefore have a meaningful effect on cash flow.
Why a 13-week cash-flow forecast?
For many SMEs, a 13-week cash-flow forecast provides an effective balance between detail and practicality.
It allows the business to map expected cash receipts and payments over approximately three months.
A forecast might include:
customer receipts;
payroll;
VAT;
PAYE and PRSI;
supplier payments;
loan repayments;
rent;
capital expenditure; and
significant one-off payments.
The purpose is not to predict every euro perfectly.
It is to identify periods where cash may become tight while there is still time to respond.
Early warning gives you more options
Discovering that the business will have a cash shortage tomorrow leaves very few options.
Identifying the same issue six or eight weeks in advance creates time to:
improve debtor collection;
postpone discretionary expenditure;
negotiate supplier terms;
review stock purchasing;
arrange finance; or
change the timing of investment.
This is why cash-flow forecasting should be viewed as a decision-making tool, rather than simply another spreadsheet.
Cash-flow and management accounts support in Wexford
Podium Finance provides cash-flow forecasting, management accounts and outsourced finance support to SMEs in Gorey, Wexford and throughout Leinster.
We help business owners understand not just whether their business is profitable, but where the cash is going and what the financial position is likely to look like in the weeks and months ahead.
If your business appears profitable but cash regularly feels tighter than expected, a structured cash-flow forecast can help identify why.
