You can be profitable and run out of money at the same time

It’s one of the most common shocks in fast-growing businesses: the profit and loss account says you’re making money, but in a given month you can’t cover payroll or suppliers. It’s not a contradiction — it’s the difference between accounting profit and actual cash.

Why these two things diverge

  • You invoice a sale today, but the client pays you in 30, 60 or even 90 days — profit is recorded when you invoice, the money arrives much later.
  • You pay your suppliers before you collect from your own clients, if your payment terms are shorter than your collection terms.
  • The VAT you charge isn’t yours: you collect it, but you have to pay it to the tax office (usually every quarter) — if you mistake it for available cash, you may come up short when the quarterly return is due.
  • There are large one-off expenses (an investment, an annual insurance payment) that aren’t spread month by month in your cash, even though their accounting effect is.

What a cash flow forecast is, in practice

It’s simply a month-by-month table (or even week-by-week if the business is tight on cash) with:

  • Expected cash inflows: payments from clients based on their real payment terms, not the invoice date.
  • Expected cash outflows: payroll, suppliers, rent, social security contributions, tax payments (with their real due dates, not rough estimates).
  • The running balance month by month, to see at what point in the year your available cash might drop to a dangerous level.

You don’t need a complex system to get started: a spreadsheet with these three columns already gives you visibility that most self-employed workers and small businesses don’t have.

The warning sign to watch ahead of time

What matters isn’t today’s balance, but the lowest projected balance in the coming months. If the forecast shows that in a given month the balance will be very tight or negative, you have time to react (negotiate terms with a supplier, bring forward a payment, apply for a credit line) if you spot it weeks in advance — you don’t have that room if you find out on the day itself.

And to avoid nasty surprises with your taxes

A well-built cash flow forecast, kept up to date with your real figures, is one of the tools with the most practical impact a small business can have. With us you can already see your income, expenses and outstanding receipts and payments in the software we use for your accounting, and very soon a forecast of what you’ll pay in your upcoming taxes too. If you like, we can also build you a template for your real situation. Write to us at contacto@asesoriamadal.es.