Why Profitable Businesses Still Run Out of Cash

Profit and cash are not the same thing.

A business can make a healthy margin on paper and still struggle to pay its bills because the timing of money coming in does not match the timing of money going out.

Construction makes this particularly visible. Labour, materials, subcontractors and overheads may all need paying before a valuation is received. Retention may be held back. A delayed payment can move a large amount of working capital at exactly the wrong time.

Growth can intensify the problem. More work often means more expenditure before it means more cash. Payroll increases, management expands and several projects may need funding simultaneously.

That is why I look beyond the profit and loss account. What is actually in the bank? What is due in and when will it realistically arrive? What commitments are coming over the next four, eight and twelve weeks? What happens if a major receipt is late?

Cash pressure quickly turns strategic decisions into reactive ones. Suppliers need negotiating with, owners start moving money between pressures and management time is consumed by whichever payment is most urgent.

Margin is essential to a healthy business. But profit on paper does not pay Friday's wages. Cash does.