“If I made all that, where is it?”

It is a question plenty of business owners ask after looking at a healthy profit figure and then checking a bank balance that feels much less impressive.

Usually, neither figure is wrong. Profit and cash simply measure different things.

A business can be profitable, busy and growing while still struggling with cash at certain points in the month. That becomes particularly important when wages, VAT, tax bills, supplier payments and other large expenses all start competing for the same bank balance.

Profit is not the same as cash

Your profit and loss report tells you whether the business has earned more than it has spent over a period.

Your bank balance tells you how much cash is actually available right now.

Imagine you complete a £10,000 project and send the invoice today. Depending on the way your accounts are prepared, that income may already contribute to your reported sales and profit.

But if the customer pays in 30 or 45 days, that £10,000 cannot pay this week's wages, rent or suppliers.

Growing businesses can feel this particularly strongly. More work may mean buying more materials, paying more subcontractors or covering additional wages before customers have paid you.

Five places your cash may be hiding

When your profit and bank balance seem to belong to completely different businesses, start here.

1. Unpaid customer invoices

You have earned the money, but you have not collected it yet. A growing list of unpaid invoices can make a profitable business surprisingly cash poor.

Review what is due, what is overdue and how long customers actually take to pay you.

2. Stock and materials

Cash may have already left your bank to buy products, stock or materials that have not yet turned into customer payments.

If you regularly buy ahead, the amount tied up here can become significant.

3. Tax money

The balance showing in your business bank account is not necessarily all available to spend.

VAT, PAYE, Corporation Tax and Self Assessment can create large payments at particular points in the year. If the money has not been separated or allowed for, an apparently comfortable bank balance can disappear quickly.

4. Equipment and loan repayments

Buying equipment or repaying borrowing affects cash immediately, but it does not always reduce the profit figure in the same way or at the same time.

This is one reason you cannot rely on the profit and loss report alone when deciding what the business can afford.

5. Money taken out of the business

Drawings, dividends and other amounts taken by an owner reduce the cash available in the bank.

They can therefore help explain why reported profit has not translated into the bank balance you expected.

The 13-week view

One of the most useful cash flow tools for a small business is also one of the simplest: a 13-week cash flow forecast.

Instead of looking at a whole year, you look at the next quarter week by week.

Start with the amount actually available in the bank today.

Then add the cash you realistically expect to receive each week. Use the dates customers normally pay you, rather than assuming every invoice will arrive exactly on its due date.

Next, enter the money expected to leave:

  • Wages and payroll costs
  • Rent
  • Suppliers
  • Loan repayments
  • Software and subscriptions
  • VAT and PAYE
  • Tax payments
  • Insurance and annual renewals
  • Any other significant planned spending

Calculate the expected closing bank balance at the end of each week.

This is where the forecast becomes useful. You might discover that cash looks comfortable for the next six weeks, but drops sharply in week seven when payroll, VAT and a supplier payment land together.

Finding that out now gives you options. Finding out when the payments are already due does not.

A useful rule: cash flow forecasting should reflect when money is realistically expected to move, not simply the dates written on invoices.

Separate money that is not really yours to spend

If you regularly find that tax payments catch you by surprise, consider separating money for them as you go.

Some business owners use a separate savings account and transfer an appropriate amount whenever customers pay them.

The percentage you need to set aside depends on your business, tax position and circumstances, so it should be based on your own figures rather than a generic percentage from social media.

The important part is that money intended for HMRC stops looking like spare cash.

Know your cash runway

Another useful number is your cash runway: roughly how long your business could continue meeting its essential costs if no new money came in.

Start by working out the essential weekly cost of keeping the business operating. Think about wages, rent, loan repayments and suppliers you could not trade without.

Then compare that figure with the cash genuinely available to the business.

There is no single number of weeks that is right for every business. A company with predictable monthly retainers has a different risk profile from one relying on a handful of large projects.

What matters is knowing your number and noticing if it is moving in the wrong direction.

Good cash flow management starts with current books

None of these calculations are especially useful if your bookkeeping is months behind.

Up-to-date records let you see what customers owe you, what bills are outstanding, what has already been paid and what liabilities are coming next.

That is why good bookkeeping is not just about getting everything tidy for a tax return.

The real value is having financial information that is current enough to use while you still have time to make decisions.

Put your profit next to your bank balance

If they look as though they belong to completely different businesses, do not assume something has gone wrong.

Trace the difference.

Look at unpaid invoices, stock and materials, upcoming tax, finance repayments, equipment purchases and money taken out of the business.

Then map the next 13 weeks.

Once you can see where the money is and when it is expected to move, cash flow becomes far less mysterious.

This article provides general information only and is not specific tax, accounting or financial advice. The right approach for your business depends on your individual circumstances.