You made a profit last month. So why is there no money in the bank? If that question sounds familiar, you've met the most misunderstood idea in business finance: profit is not cash.
Profit is an idea on paper: your revenue for the period, minus the costs of earning it. Cash is real, the actual money that moved in and out of your bank account. They sound like the same thing. They are not.
They pull apart because of timing. You record revenue when you earn it, not when the client pays. You record a cost when you incur it, not when the money leaves your account. So a month can look profitable while the bank goes backwards, or the other way round.
Let's make it real.
You invoice £50,000 of work this month, and your costs to deliver it are £30,000.
On paper, that's a £20,000 profit. A great month.
But the client pays on 60 day terms, and you paid your team and suppliers this month.
In cash, you're £30,000 down. Same month: £20,000 of profit, and £30,000 out of the door.
So where does the gap come from? Work you've done but not yet billed. Invoices raised but not yet paid. Money spent on things that don't hit the P&L straight away, like equipment or a loan repayment. And tax you owe but haven't paid yet. Every one of those splits profit from cash.
So never run your business on profit alone. Read the P&L to see if the work makes money, and watch cash to see if you can survive the wait. Both, every month.