Profit and cash are related, but they are not the same thing. A business can be profitable on paper and still struggle to pay bills, or show a loss in a month when the bank balance rises. Understanding why helps you plan.

Why profit and cash differ

The profit and loss statement records income when it is earned and expenses when they are incurred, if you use accrual-based reports. The IRS describes the cash and accrual methods in Publication 538. Cash, on the other hand, moves when money actually arrives or leaves. The common gaps are:

  • Unpaid customer invoices: income is recorded, cash has not arrived
  • Inventory purchases: cash leaves now, cost of goods sold is recorded later as items sell
  • Loan principal repayments: cash leaves, but only the interest is an expense
  • Equipment purchases: cash leaves at once, the cost is spread over years through depreciation
  • Owner draws and distributions: cash leaves, but they are not expenses
  • Tax payments: estimated tax and annual payments can be large and uneven

The cash conversion cycle

For many businesses, cash goes out for materials, stock or labour before it comes back from customers. The longer that cycle, the more cash the business needs to grow. Getting paid faster, holding less stock, or negotiating longer supplier terms all shorten it.

A simple thirteen-week forecast

A rolling forecast does not need to be complicated:

  1. Start with today's bank balance
  2. List expected customer receipts by week, based on invoices outstanding and typical payment times
  3. List payments by week: payroll, rent, suppliers, loan payments, tax payments
  4. Calculate the closing balance for each week
  5. Update it weekly with actual figures

The weeks where the balance dips are where you need to act: chase receivables, delay a purchase or arrange financing early.

Planning for tax payments

Tax is a common cash surprise. Self-employed owners usually make estimated payments; the IRS explains them on its estimated taxes page. Employers must deposit payroll taxes on a schedule; see depositing and reporting employment taxes. Put these dates in the forecast.

Planning ahead

The SBA's guide to managing your finances covers financial planning for small businesses. A forecast built from reconciled books is far more reliable than one built from memory.

Key terms

  • Cash flow: the movement of money into and out of the business over a period.
  • Operating cash flow: cash generated by the day-to-day business, before financing and investment.
  • Cash conversion cycle: the time between paying for inputs and collecting cash from customers.
  • Rolling forecast: a forecast that is updated regularly and always looks the same number of weeks ahead.
  • Cash buffer: a minimum balance kept to cover unexpected costs or late payments.

Quick wins

  • Invoice the day work is delivered
  • Offer easy payment options
  • Review supplier terms and pay on the due date rather than early
  • Hold only the stock you need
  • Put tax payment dates in the forecast

How we help

Our accounting services include cash forecasting from your actual books, and our guide to estimated tax payments explains one of the biggest cash items for owners.