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 |
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.