An owner looks at the monthly report, sees a healthy profit, and then cannot pay the suppliers on time. It feels like the accounts must be wrong. Usually they are not. Profit and cash are measuring two different things, and a business needs both to be healthy.
Where the cash goes
Profit counts a sale when it is made. Cash counts it when it is paid. If customers pay late, the profit is real but the money is still in their bank, not yours. The more you sell on credit, the wider that gap becomes — which is why a growing business is often the one that runs short.
Stock does the same thing. Goods bought and not yet sold are not an expense in the profit figure, but the cash paid for them is gone. A warehouse full of slow-moving stock is cash sitting on a shelf.
What to watch every month
- How much customers owe you, and for how long.
- How much stock you hold, and how fast it moves.
- What you owe suppliers, and when it falls due.
- A simple forecast of cash in and out for the next few months.
None of these needs a complex system to start. They need the books to be up to date and somebody to look at them every month with the question: where is our cash, and where will it be?
Profit tells you whether the business works. Cash tells you whether it survives the next few months. Read both.