How is my business profitable but I don’t have enough cash to pay my bills?

Unfortunately, this happens more often than you might think. Business owners and managers enjoy watching revenue soar but shift the focus to generating new sales instead of making sure all of the cash generated by the business is used wisely and collected on time.

First, it’s important to understand the difference between revenue, profit and cash. 

There are a lot of reasons why your income statement reports a profit but cash is playing hide-and-seek. Here are the two most common reasons why you are running out of cash:

1. It is common for businesses to experience a timing difference where your income statement tells you the company is profitable, but the profit has not converted to cash yet.

When you provide a service today and allow your customers to pay in 30 days, you’re operating using the accrual method. You record revenue when you provide the service, but you may not collect the money for weeks or even months. Before you receive the payment from your customer, you must use your cash to pay your employees and vendors. Over time, you may run out of cash if you allow too many customers to charge on their account or pay late.

A cash flow projection will help you predict the cash you’ll need so you can sleep at night knowing you can pay your employees and bills on time. 

The collection process starts during the sales cycle…not on day 31 when your customer fails to pay you on time. To help speed up the collection process,

• Clearly communicate payment terms when you review the proposal with the customer.
• Obtain the name, email address and direct phone number of the person you need to send the invoice to when the service is complete.
• Ask how often the accounts payable department cuts checks.
• Follow up with the customer to confirm they are happy with the service.
• Consider requiring a deposit before you start the project to help you reduce the risk of delivering a service and not being paid.
• Revaluate the payment terms. Instead of automatically offering 30 days, consider only 15 days for all new customers or projects under $5,000.

2. Another common reason is hiding in the profit formula: revenue – expenses. The formula does not consider the transactions that are reported on the balance sheet:
   • Cash you used to buy inventory
   • Payments to lenders to repay debt
   • Cash distribution to owners
   • Down payment to buy a new vehicle
   • Money received from a new bank loan.

Bottom Line

Revenue does not guarantee you’ll generate a profit. Profit does not guarantee you’ll always have cash in the bank.

Revenue, profit and cash are equally important to your company’s success. Instead of choosing one, pay attention to the entire business cycle. You’ll have a competitive advantage when you and your team understand these important numbers and how everyone affects them.

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