Why Cash Flow Feels Tight Even When Sales Are Good (Cash Flow vs Profit Explained)

Many small business owners find that cash flow feels tight even when sales are good. The business may be busy, invoices may be going out, and profit may even look healthy — yet the bank balance still feels under pressure.

‘Cash is king’ is a phrase that’s often tossed around in business communities – because it’s absolutely true.  Cash is king.

Cash can make or break a business.

Profitable businesses can go under because they run out of cash – it’s actually the number one reason businesses collapse.

Cash is king rings even more true in a small business!  Because there’s often very little differentiation between the business’s money and the owner’s money.  The money the business earns is what the owner uses to live on.

So, when cash feels tight in the business, it often feels even worse at home for the owner. 

And this is true even if a business is performing well on its Profit and Loss Account.  A business can be turning over a nice amount of sales, and making a nice profit on the bottom line, but it can also be struggling for cash.

In this article, we’re going to look at why that is.  Why cash can feel tight even when sales are good…

Why can a profitable business still run out of cash?

Cash Flow vs Profit

The difference between profit and cash flow is one of the biggest misunderstandings in business – because it’s often hard to identify the differences between the two.

Put simply:

• Profit is what’s left after costs
• Cash flow is when the money actually moves

Why might they be different?

You invoice a customer £2,000 in April.  This shows as sales in April in your Profit & Loss Account.  

The customer doesn’t pay you until the beginning of June though, so the cash isn’t in the bank until then.

Profit shows in April.  Cash comes in in June. 

Meaning:

• Your accounts show profit in April
• But your bank balance doesn't improve until June

This is one of the many reasons you can look profitable on paper, but actually broke in the bank.

Another way to think about it is:

• Profit tells you whether your business works
• Cash flow determines whether it survives day to day

Timing Issues (Why Busy Businesses Still Struggle)

The example we’ve already discussed highlights the biggest difference, and sometimes, issue between profit and cash flow – timing.

Cash flow problems are often timing problems.

There are common issues most businesses experience at some time or another, that are related to cash flow timing problems:

• Customers not paying on time / paying slowly
• Not spreading invoices and receipts from customers
• Paying expenses before cash comes in
• VAT or tax payments not being planned and saved for

One of the biggest impacts to cash flow is customers not paying you on time.  You do the work, or deliver the product, then you invoice and have to wait for payment – but the customer drags out the payment terms and you end up waiting for your money.

This can cause one of the second biggest impacts to cash flow – having to pay your suppliers for materials and goods, before you’ve been paid for the sale they relate to. 

In an ideal world you’d pay your suppliers with money from the sale of the goods and/or services they relate to, however sometimes the timing is off and it doesn’t work that way – which puts huge pressure on businesses.

Another big timing impact on cash flow is when businesses grow.  Inevitably you end up spending more money in the first instance – spending money to make money.

The costs increase first, then the sales increases follow this – but you have to pay for those increased costs first.  This is why growing businesses often feel tighter on cash than quieter ones.

Getting Paid Faster

Getting paid faster would often resolve a lot of the cash flow issues.  It isn’t always feasible, but there are a few things that should be at the forefront of any business owners’ mind when it comes to cash flow and way of tackling the timing problems.

1.  Deposits, Milestone Invoices

The issue of having to pay your suppliers before your customer pays you should be eliminated wherever possible.

This is where deposits, staggered invoicing and/or milestone invoicing, and payment terms comes in.  You want to switch the timing around so you pay your suppliers with money from your customer – if you can do that, you’re winning.

Taking deposits on booking customers in for goods or services can be a really nice way of turning this around, so you can pay your suppliers with money from the deposit and not be chasing your tail.

Also, if you’re working on longer projects with customers, having staged/staggered or milestone invoicing in place so you invoice throughout the project, rather than at the end, or even the beginning and the end, can be a really nice way of spreading the receipts out.

If you can get payment terms with your suppliers that are longer than your terms with your customers, that can really help too.  For example, your customer pays you in 14 days and you pay your supplier in 28 days – the customer pays before you pay the supplier.

2.  Invoicing on Time

It should go without saying – but it does, in fact, need to be said…

Customers can’t pay you until you invoice them.

Some businesses will wait days, or even weeks, before invoicing customers.  This means they’re getting free days of credit before you even send them an invoice!  Then if you give them 7, 14, 30 days to pay, they’re getting even more time before they actually have to give you your money 

Invoicing should never be delayed in this day and age.  There’s technology readily available, and at a good accessible price, for small businesses to take advantage of.  Meaning invoicing should never be delayed because you need to create a new Word document and manually type all the relevant information, including bank details and everything, into the invoice before you send it.

If you’re not taking advantage of apps, such as Xero or Quickbooks (lots of others are available too!), to quickly and easily invoice your customers – why?  These apps can raise an invoice, pop it directly into your Profit and Loss Account, then email it to your customer –as smooth as that.

And if you are using technology like this, but you wait until the end of the week, or month, to invoice – stop that! Remember, your customer can’t pay you until you invoice them, so get that invoice out as soon as you can. 

3.  Getting Paid on Time

Customers not paying you for work already done or products delivered can be the biggest issue in business. 

Sometimes they won’t pay you because they’re juggling their own cash flow issues.  Sometimes it might be that they just simply forget.  And sometimes they might just really push their luck with pushing your payment terms.

There are a few simple ways to facilitate getting paid on time, and in some instances quicker, by your customers.

• Automated Reminders

Those nice pieces of software that can help you with invoicing your customers can also automatically send reminders to your customers.  They can send these reminders at different timing intervals, to keep reminding your customers to pay.

Sometimes all it takes is one reminder, and they will nicely move things along and can you paid quicker.  If your system was sending a reminder a day after the invoice was due, without you having to manually do it, think what difference that could make to your cash flow.

• Ease of Payment

If your customers are constantly asking to pay you with a credit card, rather than by bank transfer, but you don’t have a facility to do that – then you’re missing out on customers paying you easily.

Those same systems that can send invoices, and automatically send reminders, can easily be connected to the like to Stripe and GoCardless (other payment services are available too!) to smoothly and easily facilitate you getting paid quicker.

Xero reports that businesses using online invoice payments — where customers can click a Pay Now button — get paid up to twice as fast compared to invoices that require manual bank transfers.

Why ‘Busy’ Businesses Run Out of Cash

Being busy in business doesn’t always mean healthy.

In the same way, growing doesn’t always mean in a manageable way.

Busy businesses can struggle, especially if they grow faster than cash can arrive in. 

Growing always must come in a sustainable way.  Growing in an unsustainable way can mean massively stretching your business, with costs and expenses increasing in such a way that cash coming in just can’t catch up with. 

The faster a business grows, the more money that’s needed to support that growth.

Growing faster than cash can come in, expenses increasing at exponential rates, and payment terms being stretched beyond capacity can all create a very unhealthy, yet busy, business.

If your goal is to grow your business, remember it must grow in a manageable way.

And, as you grow, don’t forget those VAT and tax payments!  Save and plan for them so they’re not the surprise that breaks the back of your business.

One Simple Habit That Protects Your Cash Flow

Most small business owners only look at the bank balance at any given point – such as today.  By doing that, they’re missing out on so many things that could potentially upend their business.

Because cash flow issues don’t start today – if there’s a problem today, the issue started weeks ago!

So, what’s the one habit you can get into to improve cash flow, and ensure you won’t be caught out. 

Simply watch: 

• Invoices due
• Money expected in
• Upcoming bills

This isn’t complicated forecasting – it’s just awareness. 

Checking that the money you’re expecting in is actually coming in is really simple, but really key.  If you don’t realise an invoice is overdue until a week later, that’s likely to add another week on to you getting paid.

Knowing what bills are coming up for payment, even if those bills are tax bills, means you won’t be caught out with your cash flow.

Cash flow stays healthy when money is coming in before, or at least in line, with money going out. 

Cash flow problems rarely appear overnight.  They usually build slowly through timing gaps, delayed payments, and expenses arriving before income.

Understanding the difference between profit and cash flow is one of the most important financial skills a business owner can develop.

When you pay attention to when money moves – not just how much you’re earning – you put yourself back in control of your business finances.

Understanding cash flow vs profit is essential for small business owners who want to build stable and sustainable businesses.