A business can report a profit and still struggle to pay its bills. That may seem contradictory, but profit and cash flow measure different things. Understanding both can help with investments, tax bills and growth.
What is the difference between profit and cash flow?
Profit reflects revenue minus costs under the relevant accounting rules. Cash flow describes money actually received and paid. The date on which a sale affects your accounts is not necessarily the date the customer pays.
For example, a business may provide services worth €10,000 excluding VAT in October but receive payment in December. The sale may already be included in its financial results, while the bank balance has not yet increased. Supplier payments and other expenses may nevertheless fall due.
Why might a profitable business be short of cash?
- Slow-paying clients: invoiced revenue is not the same as money collected.
- Stock and investments: you may pay for goods or equipment well before they generate revenue.
- Seasonality: cash receipts and fixed expenses may peak in different months.
- VAT and taxes: part of the amounts received may later have to be paid to the authorities.
- Loan repayments: repayment of borrowed capital affects liquidity differently from a normal operating expense.
The first step is not always increasing sales. It is understanding where money is tied up and when it will move.
Build a simple cash-flow forecast in five steps
1. Start with available cash
Record the opening bank balance that the business can actually use. Consider funds reserved for upcoming obligations.
2. Estimate when payments will arrive
Do not assume that invoice date equals payment date. Use realistic customer payment behaviour, outstanding invoices and expected revenue.
3. List all outgoing payments
Include rent, suppliers, payroll, social contributions, taxes, loan repayments, investments and annual or quarterly expenses. Place each item in the month when payment is expected.
4. Calculate the expected closing position
Opening available cash + expected receipts – expected payments = forecast closing cash. Repeat the calculation for several months to spot potential shortfalls.
5. Compare your forecast with reality
Update the figures regularly as new invoices, changing payment terms and unexpected expenses arise.
What warning signs should you watch?
Keep an eye on customers taking longer to pay, suppliers waiting for payment, investments absorbing more cash than expected and a growing difference between accounting results and bank balances. A one-off discrepancy need not be a crisis, but a persistent pattern deserves investigation.
Cash-flow planning matters when your business grows
Recruiting staff, buying equipment or opening new premises requires funding before the expected extra income arrives. A cash forecast can help identify this financing gap. Flemish entrepreneurship agency VLAIO explains how to estimate financing needs.
Frequently asked questions
Is high turnover enough for safe growth?
No. Profit margins, operating costs, payment terms and available reserves matter as well.
How often should I update a cash-flow forecast?
That depends on the business. A monthly review is useful for many SMEs, with more frequent monitoring where receipts and expenses fluctuate sharply.
Can my bookkeeping explain a shortage of cash?
Yes. Good accounts show outstanding invoices, expenses and obligations. A forecast also requires assumptions about future events.
Turn numbers into better decisions
Verheyen Accountants helps SMEs in Reet (Rumst) connect financial records with business plans. See our financial advice or contact the office.
Source: VLAIO — estimating financing needs. Examples are simplified and do not represent every accounting or tax treatment.