Profitable and Broke: Why Good Businesses Run Out of Cash

Look at the accounts of small businesses that have gone under and the thing that stands out is how healthy most of them look right up until they stop.

Not a slow decline. Not obvious trouble. A profitable business, with customers, doing decent work, that simply ran out of money on a particular Tuesday and could not pay somebody.

That sounds like a contradiction until you look at when the money actually moves.

Profit and cash are not the same event

Profit is a statement about a period. Over the last three months you sold more than it cost you to sell it, and the difference is yours.

Cash is a statement about a moment. Right now, in the account, there is either enough to cover what leaves this week or there is not.

They describe the same business and they routinely tell completely different stories, because the profitable version of a transaction and the cash version happen on different days. Often the gap between those days is two months.

Here is the version that catches people out. A big job comes in. Materials leave your account in week one. Wages go out across weeks one to four. You invoice on completion at the end of week four, on thirty day terms. They pay on day forty five, because they always do.

That job was profitable from the moment it was quoted. It also meant your money was somebody else's for six weeks.

Now run three of them at once, which is what a good month actually looks like, and you have spent triple, been paid nothing, and the VAT quarter has landed in the middle of it. The accounts will show the best month of the year. The bank will show you a few hundred pounds short of payroll.

Growth is the expensive bit

This is the part that feels wrong the first time anyone sees it, and it is why so many failures come immediately after a good run.

Every new job costs money before it earns money. Stock, materials, wages, a van, whatever the local version is. The faster a business grows, the more it is laying out in advance, and the further ahead of its incoming cash it gets.

A business growing slowly funds itself out of last month's takings. A business growing quickly cannot, because last month was smaller than this month needs. That gap has to be funded from somewhere, and when nobody has planned for it, the somewhere is an overdraft at whatever rate the bank fancies.

Nobody warns you about it because it does not feel like a risk. It feels like winning.

Every trade has a cash shape

There is a natural rhythm to this and it differs by sector, which is why advice that works for one business is useless to another.

Retail and hospitality take money on the spot and pay suppliers later. That is the comfortable end of it. You are effectively holding other people's money for a few weeks, which is why a cafe can survive on thin margins where a builder on the same margin cannot.

Trades, agencies and anyone invoicing other businesses sit at the opposite end. You buy first, you work, you invoice, you wait, then you chase. The money is real the whole time. It is simply not yours yet.

Anything seasonal has the problem in a third shape again. Heavy spending in the quiet months to prepare for the busy ones, with a gap that can run to half a year.

Knowing which of those you are is the difference between a squeeze you saw coming and a nasty surprise.

The thirteen week cash flow forecast

If one thing gets done after reading this, make it this. It takes about an hour, and it is the most useful hour most owners never spend.

Write out the next thirteen weeks, one column per week. In each column put the cash genuinely expected in, and the cash known to be going out. Not what has been invoiced. What will actually land, based on when that customer usually pays rather than when they agreed to.

Include everything that only appears occasionally, because those are what sink people. VAT. Corporation tax. The insurance renewal. The annual software bills that all seem to fall in the same fortnight.

Then run a balance along the bottom and find the lowest week.

Almost everyone who does this finds one week far tighter than expected, usually eight or nine weeks out, and usually because two large payments happen to land together. Spotting that in September is a scheduling problem. Discovering it in November is an emergency.

Thirteen weeks is the right window because it is long enough to include a VAT quarter and short enough that the numbers are still real rather than wishful.

What to do with the week you find

The point of finding it is that almost everything is fixable with notice and almost nothing is fixable without it.

Ask the insurer to move the renewal date, or to spread it monthly. Ask HMRC about a payment plan, which is a normal conversation had by thousands of businesses and much easier before the deadline than after. Move a supplier order forward a week or back a week. Chase the two invoices due just before the tight week rather than chasing everything indiscriminately.

Arrange the overdraft while the business looks strong. Banks are far more willing when there is no emergency, and the facility costs nothing sitting unused.

None of that is available with three days' notice. All of it is straightforward with nine weeks.

Get paid sooner

Some of this is structural and worth fixing permanently.

Deposits. Fifty percent up front on anything with material costs is ordinary practice in most trades, and the customers who object to it are frequently the ones who would have paid late anyway.

Stage payments on longer jobs, so the money comes in as the work goes out rather than all at the end.

Invoice the day the job finishes, not at the end of the month. An invoice sitting in a drawer for three weeks has added three weeks to your payment terms for free.

Make paying easy. A link, a QR code, a card reader on site. Every extra step between somebody deciding to pay and actually paying adds days.

And chase properly. Most late payments are not disputes, they are a finance department that has not been reminded. A polite email on day thirty one is normal business conduct, not rudeness.

Watch the direction, not just the balance

The single number worth knowing is not the balance today. It is whether that balance is higher or lower than it was at the same point last month.

A balance of eight thousand pounds means nothing on its own. Eight thousand and falling by two thousand a month is a business with four months left. Eight thousand and rising is a business that is fine. Same number, completely different situations, and the only way to tell them apart is to look at the direction over time rather than the figure on the screen this morning.

Most owners know their takings and very few know their trend, largely because no ordinary tool puts it in front of them.

Keeping an eye on what is moving in a business, and warning about it early enough to be useful, is what Reputcon is built for. The waitlist is on the site.