I'm Making a Profit. So Why Am I Always Running Out of Money?

A profitable business doesn't always follow through to positive cashflows. In fact a business that grows too quickly will inevitably run into cashflow shortages and having cash in the bank doesn't always mean you are making a profit.  

Understanding the difference between cashflows and profit and how cash moves through your business is going to help you run your business more efficiently and ensure your business pays for itself.

Profit is what is left over after all expenses have been paid, cash flow indicates the net flow of cash into and out of a business. This can be from operations but cash also moves through a business from financing and investing activities.

Spend Before You Earn

In most businesses, you must spend money before you can earn it. This concept is especially important when it comes to inventory or service delivery. The cash conversion cycle—the time it takes to turn investments in inventory or resources into cash from sales—plays a major role in cash flow management.

While offering credit terms may help boost sales, it also delays the inflow of cash. Successfully managing this timing requires balancing how long it takes to pay suppliers versus how long it takes to collect from customers. Favorable trading terms with both creditors and debtors can make a significant difference. (Stay tuned for our upcoming article on optimizing your cash conversion cycle.)

The Hidden Risk of Being Slow to Pay

Some business owners hold onto cash to maintain a healthy bank balance, often to the detriment of payments to key personnel, suppliers, or creditors. While it might seem like a way to stay financially “safe,” this approach can erode trust, damage vital relationships, and hurt your reputation. Over time, it may lead to missed opportunities, tighter credit terms, or a reluctance from others to work with your business.

The Impact of Investing and Financing Activities

Your business’s cash flow can also be influenced by how you manage investing and financing. For example, selling on credit might drive sales but reduce immediate liquidity. Similarly, using borrowed funds to finance daily operations rather than relying on revenue can signal deeper issues.

While borrowing is sometimes necessary, relying too heavily on external funds rather than operating cash can lead to long-term sustainability problems. Understanding how these activities affect both your profit and your cash flow is key to making sound financial decisions.

Make Cash Flow Part of Your Routine Reporting

Incorporating a cash flow statement alongside your profit and loss and balance sheet gives a complete picture of your financial health. It helps reconcile your income and expenses with the actual movement of cash—clarifying how much money is available to keep the business running.

Ultimately, cash flow management is not a one-time task but an ongoing practice. Regularly reviewing your inflows and outflows ensures you can meet obligations, take advantage of opportunities, and sustain growth without running into liquidity issues.