Help! My business made a profit, so why have I run out of cash?

Apr 28, 2018 | News

A businessman looking over the fiscal cliff.This is a question that I get asked all too often. Business owners assume that if they made a profit, there should be that amount of cash in the bank. In reality the main reason that businesses fail is because they run out of cash. With 4 in 5 businesses not making it through the first five years, cash really does have to be king.

So, where did my cash go?

Stock Holding

If you are selling any kind of product and your sales are increasing, it is likely that you will also need to increase stock holding levels to maintain adequate selection for your customers. Increasing stock levels requires additional cash and for a fast-growing business, this can be extremely difficult to manage.

Loan repayments

A business loan may be needed for a whole host of reasons, maybe to invest in plant and machinery, computer equipment, a marketing campaign or just to aid cash flow and often this is the only source of finance available to growing businesses. Loan repayments and the associated interest can be difficult to manage, even if the loan is to enable long-term business growth.


The cost of assets can be spread over several years in your profit and loss account, to reflect the length of their useful life. A small charge to your profit and loss account each month over three years is purely an accounting adjustment and this does not marry up to the fact that cash will need to be found for the asset on day 1. This causes a mismatch between profitability and cash flow.


All too often, especially in service businesses, an invoice is raised on completion of a project and then you will need to offer your client at least 30 days’ credit. However, whilst you are waiting for the cash, the work has already been done and staff need to be paid their wages at the end of the month worked, causing a mismatch between profit and cash.
A close grip on your debtors is essential and this is where cloud accounting can help, by giving you up to date information, sending automated reminders and even by enabling you to take direct debit and credit card payments – it all helps.

Forgetting to save my tax

And the most common one of all, is reaching the date that corporation tax, VAT, self-assessment tax is due and not having the cash in the bank. Every month it is important to be able to estimate your tax liability and physically move the money out of the business current account, into an account just for tax. By doing this religiously, there are no surprises or sleepless nights trying to find several thousand pounds for your taxes.

If you are struggling to get to grips with your cash flow then contact us at Lilley & Co. We can give you some advice and put a robust plan in place for your business. We work with you to become an integral part of your team. Most importantly we don’t use jargon and talk in easy to understand language.

We show a genuine interest in your business and go the extra mile to suggest ways to improve profitability, cash flow and reduce tax. The reports we produce give a powerful insight into your business and inspire you to ask more questions and really understand what the main drivers of your profitability are.

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