Cash flow: why profitable businesses run out of money
See a cash gap three months before it arrives, and know what to do about it.
7 min read
A business can be profitable on paper and still run out of money. It happens all the time, and almost always for the same reason: the money you earned has not arrived yet, but the money you owe is due now. This gap is cash flow, and managing it is most of what keeps a small business alive.
Profit and cash are different
Profit is what you earned: sales minus costs, over a period.
Cash is what is in the bank today.
They come apart whenever money moves at different times from the work. You deliver an order in March, the customer pays in May. You buy stock in January for the Diwali season in October. You pay staff on the first; your biggest customer pays on the thirtieth. On paper you made money. In the bank, you have not.
Where the cash goes missing
- Credit to customers. Every rupee a customer owes you is a rupee not in your account. Business customers often expect 30, 60 or 90 days.
- Stock. Money in boxes on a shelf is money you cannot spend on rent.
- Growth. A big new order needs materials and labour before it pays — the bigger the order, the bigger the gap.
- Lumpy bills. Tax payments, annual renewals, festival bonuses, a machine that breaks.
Growing fast is one of the most common reasons good businesses run out of cash. Each new order needs money up front, and the payments arrive later.
Look ahead, one page
Once a month, make a simple table for the next three months:
| This month | Next month | Month after | |
|---|---|---|---|
| Cash at start | |||
| Money expected in | |||
| Money going out | |||
| Cash at end |
"Money expected in" is only what you are confident will actually be paid — not what you have invoiced. If any month ends below zero, you have found the problem while there is still time to act.
What to do about a gap
- Get paid faster. Ask for an advance on large orders. Invoice the day you deliver, not at the end of the month. Follow up on the due date, politely and every time.
- Pay on the terms you are given. If a supplier gives you 30 days, use them — but never miss them.
- Hold less stock. Order more often, in smaller amounts, where you can.
- Keep a buffer. Aim to hold enough cash for at least one month's running costs. Build it in good months.
- Arrange working capital before you need it. A bank overdraft or working-capital loan is far easier to get when the business is doing well than in the week the money runs out.
Do not pay tax, PF or salaries late to cover a gap. The penalties and interest make the gap bigger, and staff remember.
Know who owes you
Keep a list of every unpaid invoice: who, how much, and when it was due. Look at it every week. The oldest money is the hardest to collect — chase it first.
Ask the tool below to look at your own cash-flow situation; describe what comes in and goes out, and it will help you find the gap and what to do about it.