A business can report a profit and still struggle to pay salaries at the end of the month. It sounds contradictory, but profit and cash are measured differently, and the gap between them is where many growing companies get caught out.
Why the two numbers drift apart
Profit follows the accounting rules: revenue is recognised when a sale is made, and costs are matched to the period they relate to. Cash follows the bank balance. The difference comes from timing and from items that never touch the income statement.
- Credit sales. The revenue is booked on delivery, but the customer may pay 60 or 90 days later.
- Stock. Cash leaves when inventory is bought, long before it is sold.
- Equipment and loan repayments. Buying an asset or repaying the principal on a loan uses cash but is not an expense in the way a salary is.
- Tax payments. VAT and corporate tax fall due on set dates that may not line up with when the money arrived.
What to review every month
- Ageing of receivables: who owes what, and for how long.
- The payables schedule: what is due in the next 30, 60 and 90 days.
- A rolling cash forecast that looks 13 weeks ahead and is updated with actuals.
- Upcoming tax, payroll and loan obligations placed on the calendar.
Reviewing these four items alongside the profit and loss statement gives management an early warning, usually weeks before a shortfall shows up in the bank.