A business owner shows me the accounts: profit for the year, €80,000. Then he opens the online banking: the balance is lower than a year ago. The question is always the same — where has the money gone? — and the answer is not in the profit and loss account, because the profit and loss account was not built to give it.
Profit measures how much value the business has generated in a period. Cash measures how much money has come in and gone out. They are two different quantities, moving to different calendars, and in a growing SME they almost always part company.
The example: +€80,000 of profit, −€100,000 of cash
Let us take a financial year closed in profit and look at what happened to liquidity over the same period.
| Item | Effect on cash |
|---|---|
| Profit for the year | +€80,000 |
| Increase in trade receivables | −€120,000 |
| Increase in stock | −€50,000 |
| Increase in trade payables | +€30,000 |
| Capital expenditure | −€40,000 |
| Change in cash | −€100,000 |
Every line has a reasonable explanation. Receivables grew because revenue grew, or because customers are paying later. Stock rose to serve the orders better. Suppliers granted a few more days. The investments were necessary. None of these choices is wrong in itself: together, though, they absorbed €180,000 that the profit and loss account does not show.
The result is a business that makes money and that, in the same year, has less liquidity to pay salaries, taxes and instalments.
The common mistake: looking only at the profit and loss account
The profit and loss account is the document the business owner knows best, because it is the one the accountant comments on at the end of the year and the one taxes are calculated on. It is also the document that arrives last: by the time it is ready, the months it describes have already gone.
Cash, on the other hand, is consumed in real time. An unplanned instalment or tax payment can turn a manageable month into an emergency, and emergencies come at a price: overdrafts, deferrals negotiated at the last minute, discounts granted to bring receipts forward. These are costs that appear on no line of the accounts, but they leave the current account.
That is why the useful question is not “how much did we earn”, but “do we know today the liquidity requirement for the next 90 days?”.
The 90-day forecast: the strain shows up first on the calendar
A 90-day cash forecast lines up, week by week, the expected receipts, the payments already committed, taxes, instalments and peaks in funding requirement. It does not take software: it takes discipline.
A simple example, with a safety threshold set at €60,000:
- Month 1 — closing cash €80,000
- Month 2 — closing cash €50,000: below the threshold
- Month 3 — closing cash €70,000
Read after the event, the quarter is uneventful: you start at 80 and close at 70. Read in advance, the second month is the point where one more payment due would trigger an overdraft. The difference between the two readings is a few weeks’ notice — and that is exactly the time it takes to chase a receipt, move a payment or talk to the bank before, rather than after.
What changes when cash is forecast
In the businesses I work with, the 13-week forecast is the first tool I build, even before the budget. Three things change quickly:
- Commercial decisions take working capital into account. A customer who pays at 120 days costs capital; knowing it before renewing the contract changes the price, or the terms.
- The relationship with the bank changes tone. Asking for a credit line with a forecast in hand is a negotiation; asking for it with the account already in the red is a cry for help.
- The business owner stops watching the balance. The balance is a snapshot of the past; the forecast is a projection that is updated every week, and that can be discussed.
Profit remains important: without profit there is no business. But profit does not pay salaries and suppliers. Cash does — and cash has to be forecast, not just checked against the balance.
This article picks up the second of the seven questions in the self-assessment “The 7 questions that reveal whether your SME is truly governable”. If you want to see how your business answers, the test takes three minutes.
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