Profit is a measurement of a period. Cash is a matter of timing. A business can earn a real profit on its income statement and still run short in the bank because the profit is tied up in receivables, inventory, debt payments, tax, and distributions that never appear as expenses. The fix is not a bigger profit. It is a forward view of cash, week by week, so the low weeks are visible before they arrive.
Why doesn't profit show up as cash?
Most businesses at this size keep their books on an accrual basis, which is the right way to do it. Revenue is recorded when the work is done or the goods ship, not when the customer pays. Costs are matched to the revenue they produced. That gives you a true picture of whether the business model works.
It also means the income statement is blind to timing. It will happily report a profitable month in which you invoiced heavily, paid your suppliers on time, and collected almost nothing. The profit is real. It just has not turned into cash yet, and payroll does not accept receivables.
Where does the cash go?
When an owner says "we made money, so where is it?", the answer is almost always in one or more of five places. None of them show up on the income statement in the way you would expect.
Receivables
Every invoice you send that has not been paid is profit you have recorded and cash you do not have. As the business grows, receivables grow with it, and the gap between earning and collecting becomes a permanent loan to your customers.
Inventory and work in progress
Materials bought and labor spent on jobs not yet billed sit on the balance sheet, not the income statement. A busy shop with a full pipeline can be cash-poor precisely because it is busy.
Debt principal
Interest is an expense. Principal is not. A loan payment that mostly repays principal reduces cash without touching profit, which is why a business can carry a comfortable profit and an uncomfortable bank balance at the same time.
Taxes and owner distributions
Estimated tax payments and distributions to owners come straight out of cash and never touch the income statement of a pass-through business. They are often the largest single outflows of the year and the least planned.
Equipment and other capital purchases
A truck, a machine, or a build-out is capitalized and depreciated over years. The cash leaves in one week.
How do you see it coming?
The tool for this is a 13-week cash forecast. Not a budget, not an annual projection, and not a monthly view. Thirteen weeks is far enough ahead to act and near enough that the numbers are real: the invoices are already out, the bills are already known, the payroll dates are fixed.
The structure is simple. Start with the bank balance today. Each week, add the receipts you actually expect to collect, based on who owes you and how they usually pay. Subtract the disbursements: payroll, rent, suppliers, loan payments, tax deposits, owner draws. The ending balance becomes next week's beginning balance. Repeat for thirteen weeks.
What you are looking for is the shape of the line, not the precision of any single week. A low week in week nine is a planning problem. A low week that shows up on Thursday is a crisis.
What do you do when a low week shows up?
Having the forecast is what turns a scramble into a set of choices. Most of them are ordinary and available to any business that sees the week coming.
- Collect. Call the customers whose invoices are due before the low week. Offer a small incentive for early payment if it makes sense. Receivables are the fastest cash there is.
- Time the outflows. Ask a supplier for terms, or shift a discretionary purchase two weeks later. Payroll and taxes do not move; almost everything else has some give.
- Hold the draw. Owner distributions are the most flexible outflow in the business. Plan them from the forecast, not from the bank balance.
- Use the line. A line of credit exists for exactly this: a known, short, timing gap. Arrange it before you need it. Banks lend more readily to a business with a forecast than to one with an emergency.
- Talk to the bank early. If the low week is deep or repeats, a term loan or a restructured payment may fit better than a line. That conversation goes well when you bring the forecast.
Questions this answers
Why is my business profitable but has no cash?
Because profit is recorded when work is done and cash arrives when customers pay. The difference sits in receivables, inventory, loan principal, taxes, owner distributions, and equipment purchases, none of which reduce profit the way they reduce cash.
What is a 13-week cash flow forecast?
A week-by-week projection of cash coming in and going out for the next thirteen weeks, starting from today's bank balance. It shows the low weeks early enough to act, using invoices and bills that are already known rather than annual assumptions.
How often should I update a cash forecast?
Weekly. Replace the week that just ended with actuals, add a new week thirteen at the end, and adjust receipts for what you now know about who is paying when. It takes less time each week once the structure exists.
ABOUT THE AUTHOR
Nik Cybulskis, CPA, CMA, CSCANik Cybulskis is the Managing Director of Wayfinder Partners, a fractional CFO and bookkeeping firm in Traverse City, Michigan. He reads the numbers for owner-led businesses between $1M and $20M in revenue, and writes about what he sees in them.