Developing Your CEO Mindset

Why Your Business Can Be Profitable and Still Feel Cash-Tight

A client came to us this year with a P&L that looked pretty much the way she wanted it to look. Revenue was up. Expenses were in line. The business was profitable.

And she still felt like she was holding her breath through the last week of every month.

The numbers said the business was doing well, but her bank account made it feel like something was off. That tension is more common than you might think.

It does not necessarily mean the financial statements are wrong. It usually means profit and cash are answering two different questions, and looking at one without the other can leave you with an incomplete picture.

Profit and Cash Tell You Different Things

Your Profit & Loss Statement helps you understand what the business earned and spent over a period of time. That matters because profitability tells us something important about the financial performance of the business.

But it does not automatically tell you how much cash is available today. Cash answers a different question: What money is actually available to the business right now?

Those numbers do not always move at the same time. You may have completed work but still be waiting to collect the invoice. You may be paying down debt. You may have money sitting in your account that needs to be reserved for taxes. Or you may have taken an owner distribution that reduced cash without showing up as an operating expense on your P&L.

So when a business owner says, “My reports say we’re profitable, but it doesn’t feel like it,” we don’t automatically assume something is wrong. We start looking at the rest of the story.

So Where Did the Cash Go?

There are a few places we often look first when profit looks healthy but cash still feels uncomfortable.

Money that has not been collected yet. You can do the work and send the invoice without having the cash in your bank account yet. If customers are taking 30, 45 or 60 days to pay, there can be a real gap between when the business earns revenue and when the money is actually available to use. That gap matters when payroll is Friday.

Debt payments. Paying down debt absolutely uses cash, but the principal portion of a loan payment does not appear on your P&L the same way an ordinary operating expense does. That means you can look at a profitable month without immediately seeing how much cash went toward reducing debt.

Taxes. This is another place where the bank balance can be misleading. Money sitting in the account is not automatically money available to spend. If part of that balance will eventually need to go toward taxes, the business has less usable cash than the account balance might suggest.

What you’re paying yourself. We want business owners to get paid. That matters. But as the business grows, the question becomes more nuanced than, “Did we make a profit?”

We also need to ask, “What does the business need to keep operating comfortably after we account for taxes, debt, reserves and the commitments coming next?” That is why owner pay cannot be viewed in isolation from the rest of the financial picture.

This Is Where the Reports Start Talking to Each Other

One of the biggest shifts we want business owners to make is to stop expecting one report to answer every financial question.

Your P&L tells you something. Your Balance Sheet tells you something else. Your cash position adds another layer, and so do accounts receivable, debt, reserves and the commitments you know are coming.

The goal is not to turn you into an accountant. The goal is to help you understand enough about your numbers that when a business decision comes up, you are not relying only on your bank balance and your gut.

Because the real questions usually sound more like:

• Can we afford to hire?
• Can I increase what I’m paying myself?
• Can we make this investment without creating a cash problem three months from now?
• Revenue is growing. Are we actually getting financially stronger?
• Can the business afford this next move?

Those are the conversations your financial information should help you have.

If Cash Feels Tighter Than It Should, Start Here

Pull your accounts receivable and ask a few basic questions. How much money is currently owed to your business? How long has it been outstanding? And how much of the revenue you are looking at on your reports has actually made its way into your bank account?

It is a simple place to start, but sometimes that number explains a lot. From there, you can look at the other pieces: debt payments, taxes, owner distributions, reserves and what the business needs over the next several weeks and months.

The question is not simply, “Are we profitable?” It is, “What are these numbers telling us when we look at them together?”

Clean Books Are the Beginning

We care about clean books. We care about accurate financial statements. But those are the foundation.

The real value comes when you can use that information to understand what is happening in your business, what may be coming next and what your numbers can support. That is the difference between receiving financial reports and having financial information you can actually use.

And that is the kind of conversation we want to keep having with business owners.

Each month at the Financial Empowerment Roundtable, we take one part of running the financial side of a business and talk through it in a practical, judgment-free way.

Join the Financial Empowerment Roundtable