Profit Is Not Cash: A Simple Cash Flow Habit for Small Businesses

A business can show a profit and still struggle to pay its bills. Profit measures what you earned. Cash flow measures when money actually moves in and out. The two often do not match.

Why they differ

• You invoice a customer in March, but the payment arrives in May.
• You buy inventory or equipment today and sell it later.
• Your tax bills arrive in lumps, not evenly through the year.
• Owner draws take cash out without showing up as expenses.

A simple cash forecast

You do not need a complex model. Make a table for the next 13 weeks with these rows:

1. Starting cash. The balance in your business account.
2. Money coming in. Customer payments you expect, in the week you expect them. Be cautious. Use the date a customer will likely pay, not the invoice date.
3. Money going out. Rent, software, payroll, supplier bills, loan payments, and taxes, in the weeks they are due.
4. Ending cash. Starting cash plus money in, minus money out. That becomes next week’s starting cash.

Update it weekly. If the ending cash dips close to zero in some week, you have time to act.

Ways to improve cash flow

• Invoice right away and state the due date on the invoice.
• Follow up on late payments quickly and politely.
• Ask for deposits on larger jobs.
• Time big purchases around your cash, not just your tax deduction.
• Keep a cash cushion. Many owners aim to hold a few months of expenses. The right amount depends on your business.

Do not forget taxes

If you are self-employed, tax is a real cost. The IRS says you generally must make estimated tax payments if you expect to owe $1,000 or more when you file. Set aside a share of every payment you receive so the money is there when the due date arrives. See quarterly estimated taxes.

Want help building a forecast? Book a call with FlowTex.

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Sources

• IRS: Estimated taxes

This article is general information, not financial or tax advice. The forecasting method is a practical suggestion, not an IRS requirement.