Draft for Ciaran's read, not published

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Profit is not cash: why a profitable business can still run out of money.

In sixteen years of being the person founders ring when the cash gets tight, I have almost never been rung by a business that was making a loss. Loss-making businesses know they have a problem. The calls come from profitable ones, because sales look fine and profit looks fine, and then payroll is tight, the tax bill has already landed, and every option left on the table is expensive.

Why do profitable businesses still run out of cash?

Because profit and cash are measured in different tenses. Profit says: over this period you earned more than it cost you. Cash says: this is what is in the bank right now. Five perfectly ordinary things live in the gap between those two sentences.

• Debtors. The invoice you raised in June is June's profit, but if the customer pays in September it is September's cash. A growing sales ledger can be a growing pile of money you do not have.
• VAT. The VAT you charge customers sits in your bank account looking like yours, then leaves in one lump every quarter, in arrears. It was never your money. Businesses that spend to the bank balance find this out the hard way, four times a year.
• Corporation tax. The better your year, the bigger the bill, and it arrives months after the profit that caused it, when the cash that earned it may already be spent.
• Stock and up-front costs. Cash leaves when you buy; profit only notices when you sell. Buying stock for a strong season drains the account long before a penny of that season's profit exists.
• Growth itself. Every new hire, bigger order and expansion is paid for in cash now against profit later. This is over-trading: the businesses that grow themselves to death are usually profitable the whole way down.

How can a profitable business run out of cash?

Mechanically, like this. Take a business making a healthy margin, growing 40 or 50 per cent a year. Customers pay on 60 days, so two months of sales are always outstanding. Growth means this quarter's outstanding pile is always bigger than last quarter's. Meanwhile stock is bought ahead of the busy season, the VAT quarter lands, and corporation tax on last year's profit falls due. Every one of those is normal, foreseeable and survivable, but they all draw on the same bank account, and none of them asks the profit and loss for permission. If the cushion is thin, three normal things landing in the same fortnight is all it takes. The profit and loss never flinches; the bank balance goes through the floor.

I have watched a real client trade through exactly that profile, growing hard for five years, profits doubling, bank balance swinging by six figures within a year from tax, stock and timing alone. That business never had a crisis, for one reason: it kept a cushion of one to two months of its cost base in the bank, so the swings landed on padding instead of on zero. The same chart with £200,000 less in it spends months below zero. Same profits. The cushion, not the profit, was the difference.

The numbers that warn you, weekly

You do not fix this with a monthly management pack that arrives three weeks after the month it describes. You fix it by looking at a handful of numbers weekly, while the options are still cheap.

• Net cash, not the bank balance: cash minus the VAT, PAYE and suppliers already spoken for.
• Your cash cushion in months: net cash divided by monthly cost base. Under one month, the next normal shock chooses for you.
• Who owes you, and how overdue: your debtors, oldest first, because that is your own money queuing to come home.
• What is leaving soon: the bills and tax already on the runway.

Fifteen minutes on a Monday. Nobody finds out they are running out of cash while it is still cheap to fix by accident; they find out because they were looking.

If you want the looking done for you

Own Your Numbers connects to your Xero read-only and sends exactly that Monday check as a one-minute briefing: cash, net cash, cushion in months, a risk rating, the debtors to chase, the bills coming up and five things to do. It is the difference between profit as an opinion and your cash as a weekly fact.

For accountants and bookkeepers

Worth sitting with: the calls come from profitable clients, and profitable clients are precisely the ones the monthly pack reassures. If a client of yours is growing fast on 60-day debtors, the P&L you produced last week will not warn either of you. A weekly look at their cushion will. Here is how practices run that without extra work.