What is wrong with my cash flow?

Your business has had a pretty good year and you’re happy with the reported profit. You appreciate you’re going to have to pay the tax man a sizeable chunk of your earnings and you want to set some aside for a rainy day (very disciplined, I like it), but you’d also like to pay out some of that profit as dividends. However, time comes to pay the dividend and there doesn’t seem to be enough cash … sound familiar?

All too often there is a disconnect between the reported performance of a business (e.g. via the profit and loss statement) and the actual cash sitting in the bank. This disparity has been known to drive small businesses owners to despair. Fear not, I’ve got the solution.

And what is that solution? Cash flow forecasting! Before we get into why that is the solution, let’s take a look at why your reported profit position doesn’t look anything like the cash sitting in your business account.

There could be a whole range of reasons for a mismatch between profit and cash, but more often than not we’ll find the answers lurking in the balance sheet. A source of mystery for many business owners, the balance sheet offers a world of information for those versed in its strange ways. Your profits are most likely hiding in one of the following:

  • Trade debtors (receivables). It’s highly likely that your profit is tied up here, in your debtors. The good news is that, eventually, the cash should turn up, but the bad news is that if your receivables process isn’t very good then it might not. Do what you can to get your debtor days ratio (the average number of days it takes people to pay you) down as low as you can to help with this issue.
  • Inventory. If you carry a lot of inventory it’s possible that you’ve spent the profits on stock. Might be time to look at how you manage the stock levels in your business or possibly move to another business model which doesn’t require you to carry the stock yourself (e.g. carry items on consignment instead).
  • Fixed assets. Perhaps you decided to buy property this year, or a new car? If so, it’s possible those profits have found their way into your fixed asset accounts. Not a lot to do here, but it’s important to keep in mind that not all assets can be depreciated immediately which means that if you’ve got profits that you’ve spent on assets you might have a tax bill on said profits but no cash with which to pay it (similar story with most of these items, actually).
  • Loans. Did you, perchance, borrow money out of your company this year? Maybe you loaned some dough to a friend with a sure-fire winner of an idea? If so, that could be the reason for your cash flow shortfall – you took it already.

There is, of course, a bunch of other explanations for the difference between your reported profit and your cash balance, but these are the ones we see most commonly.

Now, how do we avoid this confusion? As mentioned above, with cash flow forecasting. We’re not talking about micro-managing your cash flow and juggling invoices, what we’re talking about is long range (e.g. 12-24 months) forecasting for the cash balance within your business which will be based on your business budget with adjustments made for cash flow items not taken into account in the budget (e.g. dividends or asset purchases).

A good cash flow forecast will give you useful vision over what your bank account should look like over the coming years so that you can make informed decisions around making large cash payments for things like dividends, tax payments, etc. Without it, you may find yourself in the dark.


If you’d like some help building out a cash flow forecast for your business, why not get in touch today? We’ve worked with a wide range of business owners to build out meaningful reporting systems tailored to meet the needs of their businesses.