One of the stranger things about running a business is that you can be profitable and still run out of money.
This sounds like an accounting trick. It isn’t. It is usually just timing.
You win a great new client, employ someone to do the work, buy some equipment and perhaps pay a freelancer. The client loves everything, the invoice goes out, and the profit and loss report looks terrific.
Meanwhile, the new employee expects to be paid on Thursday. Your supplier expected payment last Tuesday. The client’s accounts department has decided that “30 days” means 47 days, provided nobody important is on leave.
Welcome to cash flow.
Profit tells you whether the work is worthwhile. Cash tells you whether you will be around long enough to enjoy it. You need both, but they are not the same thing.
Growing businesses are particularly good at getting caught. Growth consumes cash before it produces it. More sales can mean more wages, more contractors, more software, more stock and more GST—all before the money arrives. Sometimes the faster you grow, the tighter things become.
The answer is not to stare anxiously at the bank account each morning. The bank balance is a result, not an explanation. It cannot tell you what is due next week, which clients will pay late, or whether that large balance is partly the ATO’s money wearing a convincing disguise.
You need a simple cash-flow forecast.
Not a magnificent spreadsheet with 46 tabs that nobody opens after February. A useful forecast should show what money is likely to come in, what must go out, and the lowest point over the next few months. Update it regularly with what you now know.
The useful questions are usually quite practical:
When are the large invoices actually going to be paid?
What happens if that new employee starts a month earlier?
Can we afford to take on this project?
How much tax and GST are quietly accumulating?
When will we need an overdraft—or when can we safely take money out?
A forecast will not predict the future perfectly. That is not its job. Its job is to give you enough warning to do something sensible.
If cash is going to get tight in eight weeks, you have options. Invoice earlier. Chase debtors. Negotiate supplier terms. Delay a purchase. Arrange finance while the business still looks healthy. Have an honest conversation with a client.
If you discover the problem on payroll morning, your range of strategic choices becomes rather narrower.
Good cash-flow management is not about being cautious or avoiding growth. It is what lets you grow with confidence. You can move quickly because you know where the edge is.
Profit is important. Margins are important. But cash is the oxygen.
You do not need to worship it. You just need to make sure you don’t run out.
And it is easier to make good decisions when you can see the next few months clearly in advance.
Photo by Towfiqu barbhuiya on Unsplash