Understanding the gap between profitability and available cash
Your sales are growing.
Revenue looks healthy.
The business is reporting a profit.
So why does the bank account still feel empty?
This is one of the most frustrating situations for business owners and finance teams.
The numbers suggest that the business is doing well, but there never seems to be quite enough cash available when supplier payments, payroll, taxes and other expenses fall due.
The reason is simple:
Profit and cash are not the same thing.
And understanding the difference is one of the most important parts of managing a growing business.
A Profitable Business Can Still Run Out of Cash
Imagine a business makes KSh 10 million in sales during the month.
It has KSh 8 million in expenses.
On paper, that looks like a KSh 2 million profit.
Sounds good.
But what if customers have only paid KSh 6 million of those sales so far?
The business may have recorded KSh 10 million in revenue, but only KSh 6 million has actually reached the bank.
Meanwhile, suppliers still expect to be paid.
Employees still need their salaries.
Rent is due.
Taxes need to be settled.
The business may therefore be profitable while simultaneously experiencing a cash shortage.
That’s the difference between earning money and having money available.
Revenue Isn’t the Same as Cash Received
One of the biggest reasons businesses experience this problem is customer credit.
A company can make a sale today and record the revenue.
But if the customer has 30, 60 or 90 days to pay, the cash hasn’t arrived yet.
The business has generated revenue.
It hasn’t generated the cash needed to pay today’s obligations.
This is why finance teams need to look beyond revenue and ask:
How much of our outstanding revenue has actually been collected?
That’s where accounts receivable becomes extremely important.
Your Customers Can Be Your Biggest Cash-Flow Risk
Growing sales are usually good news.
But growing sales on long payment terms can create pressure on cash flow.
Imagine the business wins several large customers.
Revenue increases significantly.
The finance team celebrates.
Then the invoices go out with 60-day payment terms.
Meanwhile, suppliers want payment within 30 days.
The business is effectively financing the gap.
The more the business grows, the more cash it may need to support that growth.
This is one of the reasons a rapidly growing company can sometimes experience more cash-flow pressure than a smaller, slower-growing business.
The Bank Balance Isn’t a Cash-Flow Forecast
Another common mistake is looking at the bank balance and assuming it tells you how healthy your cash position is.
It tells you how much cash you have right now.
It doesn’t necessarily tell you what your cash position will look like two weeks from now.
For example, you may currently have KSh 5 million in the bank.
That sounds comfortable.
But if KSh 3 million in supplier payments, KSh 1 million in payroll and KSh 1.5 million in taxes are due soon, that KSh 5 million may not be as comfortable as it appears.
The question isn’t simply:
“How much cash do we have?”
It’s:
“How much cash will we have after everything that needs to be paid?”
This Is Where Cash-Flow Forecasting Matters
A cash-flow forecast helps finance teams look ahead.
Instead of simply reporting what happened last month, the finance team can estimate what is likely to happen next.
A basic forecast considers:
Expected cash coming in
- Customer payments
- Sales collections
- Loans or financing
- Other receipts
Expected cash going out
- Supplier payments
- Payroll
- Rent
- Taxes
- Loan repayments
- Operating expenses
- Capital expenditure
The difference gives management a better view of the expected cash position.
It also provides an opportunity to act before a cash shortage becomes a crisis.
The Earlier You See a Cash Problem, the More Options You Have
Imagine your forecast shows that the business could face a KSh 2 million cash shortfall next month.
That’s uncomfortable.
But knowing about it early gives management options.
You might:
- Follow up on overdue customer invoices
- Negotiate supplier payment terms
- Delay non-essential expenditure
- Adjust purchasing plans
- Review upcoming capital expenditure
- Arrange short-term financing
- Prioritise critical payments
Now imagine discovering the same problem when the bank account is already empty.
Your options are much more limited.
That’s why visibility matters.
Accounts Receivable and Accounts Payable Need to Work Together
Cash flow isn’t just about collecting money.
It’s about managing both sides of the equation.
Finance teams need to understand:
What are customers expected to pay us?
and:
What do we need to pay suppliers?
If customers consistently pay after 60 days while suppliers require payment within 30 days, the business has a structural cash-flow gap.
That gap needs to be managed.
This is why finance teams should regularly review:
- Outstanding invoices
- Customer ageing
- Supplier bills
- Payment due dates
- Upcoming payroll
- Tax obligations
- Recurring expenses
The objective is to understand where cash is going before it leaves the bank account.
Inventory Can Also Tie Up Cash
Cash isn’t only tied up in unpaid invoices.
Inventory can consume significant amounts of working capital too.
A business purchases stock.
The cash leaves the bank.
The inventory sits in the warehouse.
The business only gets that cash back when the stock is sold and customers pay.
If inventory moves slowly, cash can remain tied up for months.
This is why growing inventory isn’t automatically a sign of a healthy business.
Finance and operations need to understand how quickly inventory is turning back into cash.
Taxes and Payroll Can Create Large Cash Requirements
Some cash obligations are predictable.
Payroll happens every month.
Tax obligations have deadlines.
Rent is due.
Loan repayments are scheduled.
These shouldn’t come as surprises.
Yet businesses can still experience cash-flow pressure when several large obligations fall within the same period.
A good cash-flow process therefore looks beyond daily transactions and considers upcoming commitments.
Accounting Software Can Improve Cash-Flow Visibility
This is where having connected financial information becomes useful.
Accounting platforms such as QuickBooks Online and Zoho Books can bring together information around sales, invoices, expenses, bills, banking and receivables.
Instead of relying on separate spreadsheets to understand what has happened financially, finance teams can work from a more centralised view of the business.
QuickBooks, for example, provides cash-flow reporting and tools for tracking income, expenses, invoices and bills, helping businesses understand their current financial position and outstanding obligations.
Zoho Books similarly provides reporting across areas such as receivables, payables, banking and cash flow.
The technology doesn’t predict the future automatically.
But it can make the information needed to forecast the future much easier to access.
Automation Helps, But Visibility Comes First
It’s tempting to think that cash-flow management is simply about automating accounting.
It isn’t.
You can automate invoice creation.
You can automate bank feeds.
You can automate payment reminders.
You can automate transaction categorisation.
But if finance doesn’t have a clear understanding of when cash is expected to come in and when it needs to go out, the business can still experience cash-flow problems.
Technology should support the financial process.
It shouldn’t replace financial thinking.
The Questions Finance Teams Should Be Asking
Instead of asking only:
“How profitable were we last month?”
finance teams should also be asking:
How much cash do we have today?
How much are customers expected to pay us this month?
Which invoices are overdue?
What payments are due over the next 30 days?
What are our biggest upcoming cash commitments?
Are we holding too much cash in inventory?
When could we experience a cash shortfall?
What can we do about it before it happens?
These questions move the finance function from reporting the past to helping the business prepare for what’s ahead.
Profit Is Important. Cash Keeps the Business Moving.
A profitable business is not necessarily a cash-rich business.
Revenue can be sitting in unpaid invoices.
Cash can be tied up in inventory.
Supplier payments can be due before customers pay.
Large tax or payroll obligations can create temporary pressure.
None of these necessarily mean the business is performing badly.
But they do mean the business needs to understand its cash cycle.
The goal isn’t simply to know how much money the business made.
It’s to understand when that money becomes available.
Don’t Wait Until the Bank Account Is Low
Cash-flow problems are much easier to manage when they’re identified early.
If finance can see a potential shortfall several weeks in advance, management has time to respond.
If the problem only becomes visible when payments are already due, the business is forced into reactive decisions.
That’s why good cash-flow management is ultimately about visibility, timing and preparation.
Accounting systems such as QuickBooks and Zoho Books can help businesses centralise financial information, track receivables and payables, reconcile banking activity and generate reports that support better cash-flow management.
But the real value comes from what finance teams do with that information.
Because the question isn’t:
“Are we profitable?”
It’s also:
“Will we have enough cash when we need it?”
Is Your Business Managing Cash Flow or Just Checking the Bank Balance?
If your finance team is relying heavily on spreadsheets, manually consolidating information or discovering cash shortages only when they are already happening, it may be time to improve your cash-flow processes.
Remotix Solutions can help businesses assess their accounting workflows and implement solutions such as QuickBooks and Zoho Books to improve financial visibility, reporting and cash-flow management.