The accounts say you made money. The bank account says otherwise. Both are usually right, because profit and cash are different things that move at different times.
This is not a sign that something has gone wrong. It is the normal condition of a business that is growing, and the reason perfectly good companies run out of money. The question is never why is the profit wrong — it is where did the difference go, and that difference always sits in one of six places.
Work down this list. One of them is your answer, and usually you know which before you finish reading.
| Where | What is happening | How to check it |
|---|---|---|
| Most common Money owed to you Debtors | Customers have the cash, not you | The sale is profit the day you invoice it. It is cash the day they pay. If that gap is stretching, profit rises while the bank falls. |
| Debtor days | Debtors ÷ sales × 365. If you invoice on 30 days and this comes out at 60, two months of sales are sitting in someone else's account. | |
| Growth Stock and materials Working capital | Cash converted into things on a shelf | Buying stock does not reduce profit until you sell it. It reduces your bank balance the day you pay for it. |
| Stock days | Stock ÷ cost of sales × 365. Rising stock days with flat sales means cash going in and not coming back. | |
| Contractors Work in progress Unbilled work | Work done, not yet invoiced | Labour and materials have been paid for. Nothing has been billed. This is the one that catches builders, engineers and anyone working to stage payments or retention. |
| Timing VAT and PAYE Money that was never yours | Tax collected, not yet paid over | VAT you charge sits in your account until the return is due. The balance looks healthy right up to the day it leaves. It was never your money. |
| Below the line Things profit never sees Not in the P&L | Loan and lease capital repayments | Only the interest hits your profit. The capital leaves the bank and never appears in the P&L at all. |
| Drawings, dividends and equipment | Money you take out, and money spent on vans or machinery, both leave the account without reducing reported profit. |
This is the part that feels unfair. Take a contractor who wins a job worth €100,000 at a 20% margin. Good work, clearly worth doing.
To deliver it, €80,000 of materials, labour and subcontractors has to be paid for — most of it within thirty days. The customer pays on completion, sixty days later, and holds a little retention beyond that. The job makes €20,000 of profit and takes €80,000 out of the bank for two months first.
Win three of those at once and you have a very profitable business that cannot pay its suppliers. Nothing has gone wrong. You have simply funded €240,000 of someone else's work out of a bank account that does not hold it.
This is why businesses fail in a boom rather than a slump, and why “we are too busy to worry about the figures” is the most expensive sentence in business.
Debtors divided by sales, times 365. Compare it to the terms you actually give. The gap between those two numbers, multiplied by your daily sales, is cash sitting in other people's accounts. This takes ten minutes and is usually the answer.
An invoice that is ninety days late is a different problem from one that is large. Age your debtor list and start at the top. Most of what is outstanding past ninety days is not a dispute — nobody has asked firmly enough.
Unbilled work in progress is the easiest money in the business to free up, because it requires nothing from anybody else. If invoicing happens at month end out of habit, you are lending every customer an extra three weeks for nothing.
VAT and PAYE are large, fixed-date and entirely predictable. There is no excuse for either being a surprise, and they are the most common cause of a week going from comfortable to overdrawn.
Everything above is a fix after the fact. A rolling forecast tells you the low point is coming in week nine, while you still have options that do not involve asking for an emergency facility.
Almost certainly not. A profit and loss account is supposed to show profit, and it does. It answers whether the work was worth doing. It was never designed to tell you whether you can pay for it next Tuesday, and no amount of care in preparing it will make it do that.
Compare this year's balance sheet to last year's. Whatever has grown — debtors, stock, work in progress — is where the cash went. If none of them moved much, look below the line at drawings, capital repayments and equipment. The money has not vanished; it has changed shape.
It gets worse, not better. Growth consumes cash before it produces any, and the faster you grow the more you fund in advance. Busy is the condition in which this becomes dangerous, not the one that cures it.
Possibly, and there is nothing wrong with funding working capital properly. But find out which of the six it is first. If the cause is ninety-day debtors, an overdraft pays interest on money your customers already owe you — it treats the symptom and leaves the disease.
A 13-week cash flow forecast, with the assumptions behind the receipts, and a sensible view of what happens if sales come in late. The free template is in the format they expect.
Usually in a twenty-minute call, from your last filed accounts. Debtor days, stock days and the movement in working capital are all calculable from the figures already published. It costs nothing and you will know more than you did.
Twenty minutes on the phone, no charge. Tell me what the business does and what the bank has been doing, and I will tell you which of the six it is likely to be — and whether it is worth doing anything about.