Cash Flow is King: Why It Matters More Than Profit

Every year, thousands of profitable businesses fail. Not because they weren't making money, but because they ran out of cash. It's a sobering reality that catches many business owners off guard: you can have a healthy order book, strong margins, and growing revenue—yet still find yourself unable to pay suppliers, staff, or HMRC when the bills come due.

Understanding the difference between profit and cash flow is perhaps the most important financial lesson any SME owner can learn.

The Profit vs Cash Flow Gap

Profit is an accounting concept—it's the difference between your revenue and expenses over a period. Cash flow, on the other hand, is the actual movement of money in and out of your bank account. The two rarely align perfectly, and that gap can be dangerous.

Consider this scenario: you land a major contract worth £100,000. Your costs to deliver it are £60,000. On paper, you've made £40,000 profit. Excellent news. But here's the catch: you need to pay your suppliers in 30 days, pay your staff monthly, and your client's payment terms are 60 days. For two months, you're carrying the full cost of that project with nothing coming in.

The Warning Signs

Cash flow problems rarely appear overnight. Watch for these early warning signs:

•       Regularly dipping into overdraft facilities

•       Delaying supplier payments to manage timing

•       Chasing the same invoices repeatedly

•       Difficulty meeting VAT or PAYE deadlines

•       Turning down opportunities because you can't fund the work

Practical Steps to Improve Cash Flow

Invoice promptly and follow up consistently. It sounds obvious, but delayed invoicing is surprisingly common. The day you complete work or deliver goods should be the day your invoice goes out. Implement a systematic follow-up process for overdue payments—a polite reminder at 7 days, a phone call at 14 days, and escalation procedures thereafter.

Negotiate payment terms strategically. Where possible, negotiate longer payment terms with suppliers while tightening terms for customers. Even small adjustments—moving from 30 to 45 day supplier terms while reducing customer terms from 45 to 30 days—can transform your working capital position.

Build a cash flow forecast. A rolling 13-week cash flow forecast should become your best friend. It doesn't need to be complicated—a spreadsheet showing expected inflows and outflows week by week will highlight problems before they become crises. Update it weekly.

Create a cash buffer. Aim to hold at least two to three months of fixed costs as a cash reserve. Building this takes time, but even setting aside a small percentage of each payment received will grow your safety net.

When to Seek Help

If cash flow management is consuming your time and energy, or if you're constantly firefighting rather than planning, it may be time to bring in professional support. A good bookkeeper or finance team can implement systems, chase payments, and provide the visibility you need to make informed decisions.