Profit vs Cash: Why a Busy Business Can Still Feel Broke
The Common Business Owner Struggle
You’re busy, the work is flowing, and your profit and loss report shows a healthy figure.
But when you check your bank balance… it tells a completely different story.
Sound familiar? You’re not alone and it doesn’t mean you’re doing anything wrong.
Understanding the difference between profit and cash is one of the most important (and misunderstood) parts of running a small business. Let’s unpack why your business can be profitable on paper but still short on cash and what you can do to fix it.
Profit vs Cash: What’s the Difference?
Here’s the simplest explanation:
Profit = Your income minus expenses (recorded when invoiced, not necessarily when paid).
Cash = The money actually sitting in your bank account.
They should align over time but in real life, timing differences often get in the way.
Why Profit and Cash Don’t Always Match
1️⃣ Timing Differences
You might have issued a £5,000 invoice this month, which appears in your profit report but if your client hasn’t paid yet, that money isn’t in your bank.
Fix: Keep an eye on your “Aged Debtors” report and follow up promptly when invoices become overdue.
2️⃣ VAT and Tax Liabilities
If you’re VAT registered, you’re collecting VAT on behalf of HMRC it’s not your money, even though it sits in your account temporarily.
Fix: Transfer VAT and estimated corporation tax into a separate savings account each month so you’re not caught out at quarter or year-end.
3️⃣ Asset Purchases
Buying equipment or a new laptop reduces your cash immediately, but it’s not shown as an expense in your profit report, it’s an asset.
Fix: Plan big purchases ahead and build a cash buffer for them.
4️⃣ Loan Repayments and Director Drawings
Loan capital repayments and personal withdrawals don’t affect profit but they reduce your bank balance.
Fix: Regularly review how much you’re taking out of the business and make sure your cashflow supports it.
5️⃣ Delayed Payments from Clients
Late payments are one of the biggest cashflow killers for small businesses.
Fix:
Set clear payment terms (e.g., 7 or 14 days).
Use automatic reminders in Xero.
Don’t be afraid to pause work if payments fall behind: boundaries are part of good business practice.
How to Keep Cashflow Healthy
💡 1. Forecast Your Cashflow Monthly
Even a simple spreadsheet or a Xero cashflow dashboard will help you see what’s coming in and going out over the next 3 months.
💡 2. Build a Cushion
Aim to hold at least one month’s overheads in your account as a safety net: it gives peace of mind and stops panic decisions.
💡 3. Automate Where Possible
Use software tools (like Hubdoc and Xero) to keep bookkeeping current. Up-to-date records = faster insights.
💡 4. Review Pricing and Payment Terms
If your cashflow is constantly tight, you might be undercharging or offering overly generous payment terms.
💡 5. Stay Close to Your Numbers
Your financial reports aren’t just compliance documents — they’re decision-making tools. Review them monthly with your accountant or bookkeeper to spot trends early.
What You Can Do This Week
Take 10 minutes to open your Xero dashboard and:
✅ Check how much is due from customers this month.
✅ Review your VAT and tax savings balance.
✅ Forecast your next 30 days’ income vs outgoings.
Small, consistent actions make a big difference.
How Influential Accounting Can Help
At Influential Accounting, we help business owners turn financial confusion into confidence.
If you’re unsure why your bank balance and profit report never seem to agree, or you simply want to feel more in control of your cash, we can help.
📈 Let’s look at your cashflow together and build a plan that works for your goals.
Book a friendly chat today and take the first step towards stress-free finances.
Key Takeaway
Profit looks great on paper, but cash is what keeps your business alive.
By understanding the difference and managing both effectively, you’ll have the clarity (and calm) to make confident financial decisions.