You might look at your income statement and see your business is making a profit, then wonder why your bank account is nearly empty.
This isn’t just frustrating. It can endanger your business!
In short, profit and cash are not the same thing.
Here’s how easily a business can look profitable on paper but still run out of cash in real life.
How Does This Happen? A Quick Example
Let’s say you own a construction company, for example. You win a contract for a $30,000 roofing job. After completing the work, you invoice the customer. Now, your books show $30,000 in revenue.
But here’s the problem: you won’t get paid for 30 to 60 days.
Meanwhile, you’ve already spent $12,000 for materials, $10,000 for labor, and $2,000 for fuel and equipment.
Your income statement says you made a profit. But your bank account shows you’re down $24,000 until that invoice gets paid. That creates a cash flow problem.
This happens because…
- Revenue is recorded before cash is received. Your books follow what’s called the accrual method—recognizing revenue when earned, not when the money hits the bank.
- Expenses come first, payments come later. Especially in service and project-based businesses like construction, cash leaves your account long before you get paid.
- Profit is an estimate. Unfortunately, you can’t pay your bills with estimates.
3 Practical Steps to Avoid the Cash Trap
If you’re running a small business, especially in construction, trades, or services, don’t just focus on sales. Focus on cash. Because cash, not profit, is what pays the bills.
These three best practices will help.
1. Watch your cash flow like a hawk. Track what comes in and goes out weekly. Look 30 to 60 days ahead. Don’t rely only on your profit and loss statement—use your cash flow statement, too.
2. Speed up your collections. Invoice immediately after the job is done. Consider offering a 2% discount for paying within 10 days. Even switching to 15-day payment terms can help.
3. Build a buffer. Set aside 1-2 months of business expenses as a safety net. A small savings cushion can mean the difference between riding out a slow payment cycle or missing payroll.
Bottom line: Just because you’re turning a profit doesn’t mean you have cash. Understanding the difference—and planning for it—can save your business.
Interested in Learning More?
To explore this topic further, give this book a look. It’s a down-to-earth guide that helps small business owners understand your financials, even if you’re not a numbers person.
Financial Intelligence for Entrepreneurs: What You Really Need to Know About the Numbers
By Karen Berman and Joe Knight with John Case
Published by Harvard Business Press