Cash flow and profit are not the same thing

It is one of the more counter-intuitive facts in business finance: a company can be profitable on every measure, growing steadily, winning good customers, and still fail because it cannot pay a supplier in March. Profit and cash are different quantities, measured differently, and growth pushes them apart rather than together.

Where the two numbers separate

Profit is recognised when a sale is earned. Cash arrives when the customer actually pays. If you invoice in January on 60-day terms, January's profit is real, but January's cash is not — and meanwhile the costs of delivering that work were paid in January.

• Customer payment terms delay cash long after the profit is recorded
• Stock purchased ahead of sales consumes cash before any profit exists
• Equipment is paid for at once but its cost is spread across years
• Loan repayments reduce cash but only the interest portion touches profit
• Tax liabilities accrue through the year but fall due as a single payment

Why growth makes it worse

This is the part that catches people. Growth is usually funded before it is paid for. A larger order means more materials, more labour and more delivery cost, all of which leave the account before the corresponding invoice is settled. The faster the business grows, the wider that gap opens — which is why a business can be at its most fragile in its best year.

Turnover is vanity, profit is sanity, cash is reality.

The saying is worn out, but it survives because it is accurate. Cash is the only one of the three that determines whether the business is still operating next month.

What to do about it

The remedy is not complicated, but it does require doing something you may not currently do: forecasting cash separately from profit, week by week, far enough ahead to act.

1. Build a rolling 13-week cash forecast — near enough to be accurate, far enough to leave room to respond
2. List every committed outflow, including tax, loan repayments and annual charges
3. Base inflows on when customers actually pay, not on when terms say they should
4. Update it weekly, and compare last week's forecast against what happened

Most businesses that hit a cash crisis had the information needed to see it coming. What they lacked was a habit of looking.