The Classic Small-Business Surprise
You close the year "profitable" — then cannot make a vendor payment in February. How? Because profit is an accounting measure; cash is what is in the bank. They diverge, sometimes painfully.
Where the Gap Comes From
- Timing: You earn revenue on invoice but collect 30–60 days later.
- Tax set-asides: Profit includes money you must later send to the IRS — not spendable cash.
- Capital purchases: A laptop or equipment buys hit cash now but expense gradually.
- Inventory/prepaid: Cash leaves before the sale happens.
A Simple Illustration
| Month | Profit | Cash Movements | Bank Balance |
|---|---|---|---|
| Jan | +$3,000 | +$1,000 collected, −$2,000 equipment | −$1,000 |
| Feb | +$3,000 | +$5,000 collected | +$4,000 |
Two profitable months, but January still drained the bank. Cash timing, not profit, caused the pinch.
Habits That Protect Cash
- Invoice immediately and bill deposits or milestones up front.
- Keep a tax reserve in a separate account so profit isn't mistaken for spendable cash.
- Forecast 13 weeks of cash, not just a yearly P&L.
- Match big purchases to strong-collection months.
Mind the working capital: Working capital = current assets − current liabilities. Positive working capital means you can cover short-term bills from short-term resources. Watch it like a pulse.
Profit tells you if the business model works. Cash tells you if you will survive to enjoy it. Track both.