Your profit and loss account says you made £6,000 last month. You have a profitable business. Your bank balance fell by £4,000 in the same month. Both numbers are right. That gap between the profit you earned and the cash you hold is where growing businesses come unstuck, and the Federation of Small Businesses estimates late payment alone forces around 50,000 small firms to close every year.
The difference between profit and cash
Profit is what you earn on paper: the sales you have invoiced minus the costs you have run up, whether or not any money has moved. Cash is the money actually sitting in your account today. They are not the same number, and they rarely move at the same time.
Here is how the gap opens. You invoice £30,000 of work in June. The costs of doing that work are £24,000. On paper you made £6,000. But your customers pay on 60 day terms, so June’s cash does not land until August. The money arriving in June came from April, when you invoiced only £20,000. So £20,000 comes in, £24,000 goes out on wages and suppliers, and your balance drops by £4,000 in a month the accounts call profitable.
What the gap is actually telling you
A widening gap between profit and cash usually means one thing: growth is eating your money. Every new order has to be funded before the customer pays for it, so the faster you sell, the more cash you tie up in work you have not been paid for yet.
A stable gap means your collection and payment patterns are holding steady. A gap that swings against you, profit up but cash down month after month, points to one of three things: customers taking longer to pay, stock building up on the shelf, or money going out on equipment and tax that never touches the profit figure. None of these show up in your P&L. All of them drain the bank.
How to track the gap properly
- Pull two numbers each month: net profit from your P&L and the actual change in your bank balance.
- Track the difference between them as a single figure, month by month, on one line.
- Watch your debtor days, the average time customers take to pay. Rising debtor days is the most common cause of a widening gap.
- Compare this month against the same month last year, not just last month, so seasonal swings do not fool you.
- Check it monthly at minimum. Weekly if you are growing fast or your margins are thin.
What to do when the gap turns against you
First, chase the cash you are already owed. Send invoices the day work is done, not at month end, and call anything past terms. The average small business is owed around £22,000 in late payments at any time.
Second, look at your terms. If you give customers 60 days but pay your suppliers in 30, you are funding the difference yourself. Shorten what you offer or negotiate longer with suppliers.
Third, if growth is the cause, slow your invoicing to match what you can fund, or arrange finance deliberately rather than discovering the hole after it opens.
One thing to do this week
Open your accounts and write down two numbers for last month: your net profit, and the change in your bank balance from the first day to the last. Subtract one from the other. That single figure is your profit to cash gap. Do it now, and you have a baseline to track every month from here.
FinanceMOT measures this directly. It reads your accounts and reports the gap between your reported profit and your real cash position under the Liquidity pillar, then scores it from 0 to 100 against businesses like yours. Instead of finding the hole when the bank balance runs dry, you see it building while there is still time to act. Your accountant shows you the numbers. FinanceMOT tells you what to do about them.
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