Profit and cash are not the same thing

This sounds basic, but it trips up most small business owners. You can be profitable on paper and have no money in the bank. You can have plenty of money in the bank and be losing money on every job.

Profit is what's left after expenses are subtracted from revenue, both calculated on an accrual basis. Cash is what actually moved into and out of your bank account.

The three things that decouple cash from profit

  1. Timing of revenue. You earn revenue when you deliver the work or product, but you collect cash when the customer actually pays. If your invoices sit at 60 days, you're profitable but cash-poor.
  2. Timing of expenses. Same in reverse. You may have paid cash for inventory or equipment that doesn't show up as expense yet (or shows up over years as depreciation).
  3. Loan and tax timing. Loan principal payments and HST remittances move cash but don't affect profit.

The two cash-flow numbers worth tracking monthly

You don't need a complicated cash-flow statement. You need two numbers:

  • Operating cash flow. How much cash your business actually generates from running normally, before financing or investment activity. If this is consistently positive, you're solvent. If it's negative, you have a problem.
  • Cash runway. How many months you could survive at current burn if revenue stopped tomorrow. For most small businesses, 3+ months is healthy.

Common cash flow killers

  • Slow-paying customers. Your AR aging report shows this. Net-30 invoices that drift to 60 or 90 days will starve you.
  • Inventory creep. Money tied up in unsold stock isn't earning anything.
  • Seasonal revenue without seasonal expense control. Common in trades and fitness. The summer/January bumps need to fund the slower months.
  • Surprise tax bills. HST and income tax bills hit if you didn't set the cash aside.

How to keep cash flow visible

The single best thing you can do is build cash-flow review into your monthly bookkeeping routine. Item 8 of our checklist — comparing this month to last month — is where cash flow becomes visible.

Our Growth and Pro packages include monthly cash-flow tracking as a standard part of the insight layer. If your business has had a cash scare, that's the part you want.