A business can be profitable on paper and unable to pay its bills. This isn't an accounting curiosity — it's one of the most common causes of business failure, and it catches people who are doing well.

Where the gap comes from

Profit is calculated on an accruals basis: revenue is recognised when earned, costs when incurred, regardless of when money moves.

Cash is when money actually arrives and leaves.

The gap between them is created by timing, and there are several sources.

Customer payment terms. You deliver in January, invoice in January, get paid in March. The profit is January's; the cash is March's.

Stock. Money spent on inventory leaves immediately and returns only when the goods sell. A growing retailer is continuously converting cash into stock.

Supplier terms. If you pay suppliers faster than customers pay you, you're financing the difference.

Capital purchases. Equipment is paid for at once and depreciated over years. The cash impact is immediate; the profit impact is spread.

Why growth makes it worse

The counterintuitive part that catches people who are succeeding.

Each new order requires cash before it generates cash — materials, labour, stock, delivery. If revenue is growing, the amount tied up in this cycle grows with it.

So a rapidly growing profitable business can consume cash faster than it generates it, indefinitely, until it runs out. Overtrading is the traditional term and it's a genuine and common failure.

This is why a business can go under immediately after its best quarter. The order book was strong, the work was profitable, and there was nothing in the account on the day the wages were due.

The cash conversion cycle

The single most useful number for a small business, and most don't calculate it.

It's the number of days between paying for something and getting paid for it. Roughly: days of stock held, plus days customers take to pay, minus days you take to pay suppliers.

A positive figure means you're funding the gap. A cycle of sixty days means every pound of sales requires you to have funded two months of activity.

Some businesses have negative cycles — customers pay before suppliers are paid. Subscription businesses billing annually in advance, retailers with fast stock turnover and long supplier terms. These businesses generate cash as they grow, which is an enormous structural advantage.

Knowing which type you are should shape almost every financial decision you make.

Practical levers

Each component of the cycle can be attacked.

Getting paid faster. Invoice immediately rather than at month end — the delay is pure lost cash. Make terms explicit and enforce them. Chase before due dates rather than after. Take deposits or stage payments on larger jobs. Make paying easy, since awkward payment processes genuinely delay settlement.

Paying more slowly. Negotiate longer terms with suppliers, which is a normal commercial conversation. Take terms you've been offered rather than paying early out of habit. Don't take early payment discounts without checking the implied annual rate, which is frequently high but needs comparing to your cost of capital.

Holding less stock. Cash sitting on shelves. Slow-moving inventory is worse than it looks, because it's both tied-up cash and a likely future write-down.

Forecasting, done simply

A thirteen-week rolling cash forecast is the single highest-value financial practice available to a small business, and a spreadsheet does it.

Opening balance, expected receipts by week, expected payments by week, closing balance. Updated weekly.

Thirteen weeks because it's long enough to see problems with time to act and short enough to forecast with reasonable accuracy.

What it gives you is warning. A shortfall visible eight weeks out has many solutions — chasing a debt, delaying a purchase, arranging finance. The same shortfall discovered on the day has one.

Arranging credit early

The general rule: borrowing is available to businesses that don't obviously need it and unavailable to those that do.

An overdraft or facility arranged while things are comfortable costs little to hold and provides genuine protection. The same request made three weeks before a crisis is a different conversation with a different answer.

Invoice financing is worth understanding for businesses with long receivables. It's more expensive than bank lending and it converts receivables into immediate cash, which for some businesses is exactly the right trade. The costs vary considerably and should be compared properly.

The one thing

If a business does nothing else, it should know its bank balance and its committed outgoings for the next month, every week, without having to look anything up.

An extraordinary number of small businesses don't, and discover problems when a payment bounces. That's not a knowledge gap about finance — it's a habit, and it takes about fifteen minutes a week to establish.

The tax timing trap

One recurring cause of cash crises deserves separate mention because it catches profitable businesses specifically: tax bills arriving for a period that has already been spent.

Corporation tax, VAT or sales tax, and payroll obligations all fall due after the activity that generated them. A business that had a strong year and spent the proceeds on growth can face a substantial bill for profits that no longer exist as cash.

Sales tax is the most dangerous version, because the money was never yours — you collected it on behalf of a tax authority and it sat in your account looking like working capital. Businesses routinely spend it and then cannot settle.

The fix is mechanical and effective: a separate account, money transferred as it is collected, never touched. It removes the temptation entirely and it is one of the few financial disciplines that requires no ongoing judgement.