Hello Reader,
When cash feels tight, most people cut costs first. Sometimes that's the right move. Often it isn't.
Here's why.
Profit is what's left over once you take your expenses away from your revenue. But profit doesn't care when money actually moves. If you send a customer an invoice, that counts as revenue, even if they haven't paid you yet. If a supplier sends you stock before you've paid for it, that still counts as an expense.
Cash works differently. Cash only cares about what's actually moved. What's really sitting in your account right now.
Here's what that looks like in real life. Say a customer owes you $5,000 for a job you finished last month. On your profit report, that money is already counted. In your bank account, it isn't there yet. If a few of those add up at the same time, you can end up with a strong profit and a tight bank account, at the exact same moment.
That gap between profit and cash is where most of the pressure builds. Usually it comes down to a few things. Maybe customers are taking too long to pay. Maybe stock is sitting on the shelf instead of turning into cash. Or maybe you're paying suppliers faster than your own customers are paying you.
None of that shows up as overspending on a report. It just shows up as a business that looks fine on paper and feels tight in real life.
So next time cash feels tight, don't just ask where you're spending too much. Ask where your cash is sitting still instead of moving. That's usually the better question.
That's not a spending problem. It's a timing problem.
Before you close this email, do one thing. Open your accounting software and look for the largest unpaid invoice sitting there right now. Ask yourself honestly, have you been treating that money as already spent? If yes, that's your leak. Start there.
Talk soon,
Paul Sweeney
Chartered Accountant & Business Advisor
