A profitable business can run out of money, and it happens routinely. Profit counts a sale when it is earned; cash arrives when the customer actually pays. Everything between those two moments has to be funded from somewhere.
Where the gap comes from
- Payment terms. You deliver in January, invoice on net 30, and get paid in March if they are slow. Your costs were incurred in January.
- Inventory. Money converted into stock sitting on a shelf is money you cannot spend.
- Growth. Counter-intuitively, growing fast consumes cash - you fund more materials, more payroll and more inventory before the larger receipts arrive.
- Lumpy costs. Annual insurance, tax payments, equipment. Predictable, but not spread evenly.
- Tax kept in the operating account. Money that was never yours, spent as though it were.
Move a fixed percentage of every deposit into a separate tax account on the day it lands. It converts the largest recurring cash shock most small businesses face into a non-event. See estimated quarterly taxes.
A forecast you will actually maintain
A thirteen-week rolling forecast is the standard tool, and it does not need to be sophisticated. A spreadsheet with one column per week:
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Opening balance
What is actually in the bank at the start of the week.
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Expected receipts
Invoices by the date you realistically expect payment, not the due date. If a customer always pays two weeks late, forecast two weeks late.
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Committed payments
Payroll, rent, loan payments, supplier invoices, tax payments, subscriptions.
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Closing balance
Carried to the next week. Any week that goes negative is a problem you now have weeks of warning about.
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Update weekly
Roll it forward every week with actuals. The discipline matters more than the precision - a forecast updated weekly and roughly right beats a detailed model built once.
Levers that speed money in
- Invoice immediately. The clock starts when the invoice is sent, and delays here are entirely self-inflicted.
- Take deposits. A deposit up front on larger jobs funds the work rather than your overdraft.
- Milestone billing. For long projects, bill progressively instead of once at the end.
- Shorten terms. Net 15 instead of net 30, agreed at the start rather than imposed later.
- Make paying easy. Card and ACH options are usually worth their processing fee in days saved.
- Follow up systematically. A polite reminder the day after due date, then at set intervals. Most late payment is disorganisation, not refusal.
Levers that slow money out
- Use supplier terms fully - pay on the due date rather than early, unless there is a worthwhile early-payment discount.
- Negotiate terms once you have a payment history. Suppliers extend terms to reliable customers more often than people ask.
- Spread lumpy costs where monthly options exist and the financing cost is modest.
- Lease rather than buy equipment when preserving cash matters more than total cost.
- Watch subscriptions. They accumulate invisibly; review the full list twice a year.
A line of credit is easiest to obtain when your figures look healthy, which is precisely when you do not feel you need it. Applying during a squeeze is slower, dearer and more likely to be declined.
What to watch
| Measure | What it tells you |
|---|---|
| Cash runway | How many months of operating costs your balance covers |
| Days sales outstanding | Average days to collect. Rising means collections are slipping |
| Receivables ageing | Which invoices are 30, 60, 90 days overdue. Anything past 90 needs escalation |
| Customer concentration | What share of revenue sits with one customer. High concentration turns one late payer into a crisis |
Before spending to bring in more work
Promotion can create costs before it creates receipts: print and advertising bills, time spent quoting, then materials and labour for the work you win. Put those payments and the expected customer receipts into the forecast. The marketing budget worksheet helps you check the timing and what you can deliver before committing to another campaign.
When it is already tight
- Build the thirteen-week forecast first. Decisions made without visibility tend to be the wrong ones.
- Prioritise payroll and payroll taxes - the penalties and personal exposure on unpaid payroll taxes are severe.
- Talk to suppliers early. Most will agree a plan if approached before a payment is missed rather than after.
- Chase the oldest receivables personally rather than by email.
- Be cautious with high-cost short-term financing; daily-repayment products can deepen the problem they appear to solve.
Questions owners ask
How much cash reserve should I hold?
It depends on how variable your revenue is and how fixed your costs are. Rather than a blanket figure, work out your monthly fixed costs and decide how many months of those you want covered - a business with steady contracts needs less than a seasonal one.
Should I offer early payment discounts?
Only if you work out the annualised cost. A discount for paying weeks early can be expensive relative to other financing. It is worth it when cash timing genuinely constrains you, and not otherwise.
My books say I am profitable but I have no money. Why?
Typically money is tied up in receivables or inventory, or going out on things that are not expenses - loan principal, owner draws, equipment purchases. None of those reduce profit but all of them reduce cash. Compare your profit and loss with your balance sheet to find it.