Why profitable businesses run out of money
More small companies die with a profit on paper than with a loss. This is the arithmetic of how that happens.
6 minute read · part of the free minekop guides
Profit and cash are not the same thing, and the difference is timing. Profit asks whether the work you did was worth more than it cost. Cash asks whether the money has actually arrived yet. A business can be right about the first and dead because of the second.
The gap, in one example
An agency wins a 60,000 project, delivered over three months, paid
60 days after the final invoice.
The P&L shows 20,000 of revenue in each of months 1, 2 and 3, and
staff costs of 12,000 a month. Profit: 8,000 a month. Excellent.
The bank pays out 12,000 in each of months 1, 2, 3 and 4 — the
staff do not disappear the day the project ends — and receives 60,000 in month 5.
That is 48,000 out of the door before a penny comes in, on a job that made 24,000 of
profit. If the agency started with 30,000 in the bank it is empty during month 3,
and it never reaches month 5.
Nothing went wrong in that story. Nobody was late, nobody was cheated, the work was profitable. The company simply had to fund four months of cost before the money came in, and did not have it.
The four things that open the gap
- Customers paying late. 30-day terms usually mean 45 days in practice. 60-day terms often mean 90.
- Stock. Every item on a shelf is money you have already spent and not yet earned.
- Buying things that last. A 24,000 machine is one payment now and 24 monthly slices of depreciation on the P&L. Cash and profit disagree for two years.
- Growth. The cruel one. Doubling sales means doubling the stock and the wage bill before any of the new revenue lands. Fast growth eats cash, and the faster you grow the more it eats.
Building a monthly cash forecast
Twelve columns, one per month. Four blocks.
- Opening balance. What is in the bank on day one.
- Money in. Sales, but shifted to when you actually get paid. If your terms are 30 days, January's sales are February's cash. Add anything else real: a loan, an investment, a tax refund, a grant.
- Money out. Wages and the taxes on them, suppliers, rent, everything. Put each one in the month it actually leaves the account. Do not forget the quarterly and annual ones — VAT, insurance, corporation tax.
- Closing balance. Opening plus in, minus out. It becomes next month's opening.
Then read the closing row across. The lowest number in it is the only figure that matters: that is how much cash the plan needs you to have. If it is negative, the plan does not work as written, however good the profit line looks.
Two rules of thumb. Keep three to six months of fixed costs as a buffer. And arrange any borrowing while the numbers still look good — a bank that sees your low point coming lends far less willingly than one that sees it six months out.
Closing the gap
Almost everything you can do is a version of "get paid sooner, pay later, or need less in between".
- Invoice the day the work is done, not at month end. This is free and it is the single biggest win available to most small companies.
- Take a deposit. 30% up front turns the agency example above from fatal into survivable.
- Bill in stages on anything long.
- Chase early and politely. Most late payment is not malice, it is an invoice sitting in a queue.
- Ask suppliers for terms. They often say yes and are rarely asked.
- Hold less stock. Slow-moving inventory is cash on a shelf.
- Rent instead of buying when cash is tight, even though it costs more over the life of the thing.
Runway, and how to work it out
If the company is spending more than it earns — normal for anything new — the number everybody asks for is the runway: how many months until the money runs out.
Cash in the bank 90,000. Money out each month
34,000, money in 19,000. Net burn is
15,000 a month, so the runway is 90,000 ÷ 15,000 =
6 months.
Now add the thing people forget: raising money, or getting a loan, takes three to
six months of somebody's time. A six-month runway means you should already be doing
it, today, not in month four.
Two warnings about that sum. First, use net burn, not total spending — the money coming in counts. Second, burn is rarely flat: if the plan hires two people in month three, the runway is shorter than the simple division suggests. Read the closing balance row of the forecast instead, and find the month it goes negative. That is the real answer.
And if the runway is uncomfortable, remember there are two levers, not one. Cutting cost extends it, and so does bringing money in sooner. The second is usually faster and always less painful.
Update it weekly when things are tight
A monthly forecast is fine when there is comfortable headroom. When the low point is close, go weekly, and use the real bank balance as the starting point each time. Forecasts drift; bank statements do not.
And watch the direction of the error. If you are consistently 10% optimistic about when money arrives, you will keep being surprised in the same way. Adjust the assumption rather than the story.
The one-line summary
Profit tells you whether the business model works. Cash tells you whether you will be there long enough to find out.
Try it
Money in, money out, and the closing balance each month.
320 × 100