$ · Running the business
Cash flow and the numbers that keep you alive
Profitable businesses go under every year because they run out of cash. Knowing your numbers isn't paperwork. It's how you see trouble coming months before it arrives. The good news: you don't need to be an accountant to read the warning signs.
Profit and cash are different things
Most businesses record income when the work is billed, not when the money arrives. That's called accrual accounting, and it gives a truer picture of how the business performs. But it means your income statement can show a strong profit while your bank account is nearly empty, because clients haven't paid yet and your bills came due anyway.
This is why owners need to watch both: profit tells you whether the business model works, and cash tells you whether you'll survive long enough for it to matter.
■ The three reports
What each financial statement tells you
You don't need to be an accountant to read your own reports. You need to know which question each one answers.
Did we make money?
Also called the profit and loss (P&L). Revenue minus expenses over a period, like a month. Compare each month with the last one and with the same month last year.
What do we own and owe?
A snapshot on one day: cash, money owed to you, equipment, what you owe others, and what's left for the owner. It shows whether the business is getting stronger or weaker over time.
Where did the cash go?
How cash came in and went out: from running the business, from buying equipment, and from loans or owner money. It explains why profit and the bank balance don't match.
■ Watch these
Five numbers every owner should know
| Number | How to work it out | What it tells you |
|---|---|---|
| Runway | Cash on hand ÷ monthly expenses | How many months you could survive with no new money coming in. |
| Gross margin | (Revenue − direct costs of the work) ÷ revenue | How much of each dollar is left after doing the work, before overhead. |
| Net margin | Net profit ÷ revenue | How much of each dollar you actually keep. |
| Days to get paid | (Money owed to you ÷ monthly revenue) × 30 | Roughly how long clients take to pay you. Accountants call this days sales outstanding. |
| Current ratio | Current assets ÷ current liabilities | Whether you can cover the bills due within a year. Below 1 is a warning sign. |
The monthly close: a tight-ship routine
Once a month, within the first week or two, close the books and review them. This is the single most useful financial habit an owner can build.
- Record every transaction for the month and match receipts.
- Reconcile every bank and credit card account to the statement.
- Review who owes you money and how long they've owed it.
- Review what you owe and when it's due.
- Compare this month's income statement with last month and last year.
- Check margin by type of work or client.
- Update your cash forecast for the next three months.
Forecast cash, don't just record it
Your books tell you what already happened. A cash forecast tells you what's coming. List the cash you expect to come in and go out week by week for the next 13 weeks, about one quarter. Many finance teams use this rolling 13-week view because it's far enough ahead to act and close enough to be accurate. When the forecast shows a dip, you have weeks to fix it instead of days.
Habits that protect your cash
- Keep business and personal money separate. Separate accounts, separate cards. Mixing them makes your numbers meaningless.
- Invoice the day the work is done. Every day you wait is a day added to when you get paid.
- Set aside money for taxes as it comes in. Move a share of each payment into a separate account so tax bills never become a crisis. A tax professional can tell you the right share for your situation.
- Build a cash cushion. Many advisors suggest keeping several months of expenses in reserve. Decide your number and treat it as a tripwire.
- Get credit before you need it. Banks lend more easily to businesses that don't need the money yet.
General education only. For tax or accounting decisions about your business, talk to a qualified professional.
Go deeperCase file, step-by-step how-to, common mistakes and questions to work through
Case file: Profitable and nearly broke
A fictional example
Sofia owns an event rental company: tents, tables, chairs and lighting. Her income statement for the year shows a healthy profit. Yet every January through March she struggles to pay bills, and twice she's used a personal credit card to cover payroll.
She built a simple 13-week cash forecast for the first quarter, listing every expected deposit and every bill, week by week. The pattern was obvious once it was on paper. Her events are heavily concentrated in May through October. In winter, revenue drops sharply, but loan payments, insurance, storage rent and two year-round employees continue. On top of that, she'd been buying new inventory every fall with the summer's cash, right before the slow season.
Her runway in January was barely five weeks.
She made four changes. She moved inventory purchases to March, after taking spring deposits. She started requiring a 50% deposit when events were booked, which pulled cash forward into the slow months. She set aside a fixed share of every summer deposit into a separate "winter account." And she opened a line of credit in August, while her numbers looked their best.
The next winter, her forecast showed runway above three months the whole season. Her profit was about the same. Her stress was not.
How to build a 13-week cash forecast, step by step
- Make 13 columns, one for each of the next 13 weeks, and start with today's actual bank balance.
- List expected cash in, by week: invoices due, deposits, recurring payments. Use realistic dates, not invoice due dates.
- List expected cash out, by week: payroll, rent, loan payments, taxes, regular bills, planned purchases.
- Calculate the ending balance each week. Mark any week that drops below your minimum cushion.
- Plan fixes for the low weeks now: collect sooner, delay a purchase, arrange credit, adjust timing.
- Update it every week, adding a new week at the end and replacing estimates with actuals.
"We're updating our payment terms for all clients. Starting next month, invoices will be due in 15 days instead of 30. For larger projects, we'll ask for a 50% deposit at booking. Let me know if you have any questions."
Common mistakes and how to fix them
| Mistake | Fix |
|---|---|
| Assuming profit means you have cash | Track both. Check runway weekly, profit monthly. |
| Forecasting cash in on invoice due dates | Use when clients actually pay, based on your history. |
| Making big purchases right before a slow season | Time purchases to your cash cycle, not just when you have money. |
| Mixing personal and business money to cover gaps | Keep them separate and arrange business credit early instead. |
Questions to work through
- What's your runway today, in months? When did you last calculate it?
- Which months of the year are tight for cash in your business, and why?
- How long do clients actually take to pay you, compared with your terms?
- What could you collect sooner: deposits, faster invoicing, shorter terms?
- If your largest expected payment arrived a month late, what would happen?