Why is my business profitable but out of money?

Profitability is a measure of whether a business plan is successful over a period. Cashflow is what money is available at any point in time to pay salaries and bills or buy stock and equipment. It is possible to be profitable yet short on cash because the timing of revenue and expenditure means that the bank balance can drop to zero whilst waiting to be paid.

Most financial software is limited in its ability to plot and forecast cashflow. There are commercial tools that can ingest your historic data and use it to track patterns of income and expenditure and flag when cash is expected to drop below a threshold. They work well for business with relatively predictable financial operations. Manual adjustments (such as for replacement of assets) can be made to cover known one-off events.

It is also possible that revenue is over-stated due to a misunderstanding of GST rules, or that costs the business incurs are not recorded in the financial data due to a misunderstanding of the costs of sale (such as payment gateway commission). Factors such as amortisation and depreciation, and accrual treatment of invoices and bills mean that the financial position is misaligned with the cash position.

If the mismatch is not an error or an effect of misunderstanding the financial statements, then an examination of expenditures versus revenues needs to be made. Timing of expenditures and payment of invoices need to be plotted out on a timeline to look for the peaks and troughs. Solutions vary from keeping a buffer of cash, to realigning payment dates to smooth the cashflow.

It is very important to separate personal transactions from business transactions to avoid costs going undetected when evaluating the costs of doing business.

Managing all of this in an ongoing manner is how we define financial fitness.