It is the last week of the month. Your bookkeeper has sent the management accounts and they are good: £40,000 of profit for the year to date, up on last year, margins holding. Your bank balance is £1,800 and there is a payroll run on Friday for £9,400.
Nothing is wrong with the accounts. Nothing is wrong with the bank. The two documents are answering different questions, and only one of them is asked by your staff.
Profit is an opinion about timing
A profit and loss account is prepared on the accruals basis. Income is recognised when you earn it, not when the money arrives. Costs are recognised when you incur them, not when you pay them. That is the whole of the difference, and it is deliberate: it tells you whether the trading itself makes sense, stripped of the accident of when cheques clear.
So an invoice raised on 28 March for work done in March is March income, even if the customer pays in June. A van bought for £24,000 does not appear as a £24,000 cost. It is capitalised and depreciated over its useful life, so perhaps £4,800 a year appears in the P&L while £24,000 left the bank on day one.
Stock behaves the same way. Money spent on stock sits on the balance sheet as an asset until it is sold, at which point it becomes cost of sales. Buy a pallet in November for the Christmas trade and your profit is unmoved in November. Your bank is down by the whole pallet.
VAT is the other one. You collect VAT from customers, hold it, and hand it over quarterly. It was never your money, it never appears in the P&L, and for the weeks it sits in your account it looks exactly like money. Businesses that spend their VAT are extremely common and it is a slow, quiet way to end up in a payment plan with HMRC.
Growth eats cash before it pays any
This is the counterintuitive part, and it is why solvent, profitable businesses fail.
Take a business with 30-day terms that customers stretch to 55. You win a large new account. To serve it you buy materials, pay staff overtime, and perhaps take on someone. Materials are paid on your suppliers' terms, say 30 days. Wages are paid weekly or monthly with no terms at all. The customer pays 55 days after you invoice, and you invoice at the end of the job.
So you fund the whole thing for two to three months. Double the work and you double the funding gap. The more successful the month, the further down the bank goes. Accountants call it overtrading and it is a common cause of failure in a growing business, more common than weak demand.
The arithmetic that matters is the cash conversion cycle: how long stock sits before it sells, plus how long customers take to pay, minus how long you take to pay suppliers. A shop selling for cash has a negative cycle and is funded by its own customers. A contractor billing on completion with 60-day terms has a long positive cycle and is funding everybody else.
Watch four numbers, not fourteen
You do not need a treasury function. You need to know, every week, what is coming and what is going.
- Debtor days: total unpaid sales invoices divided by annual sales, times 365. If it is above your stated terms by more than a fortnight, your credit control is the problem, not your pricing.
- The thirteen-week forecast: a simple week-by-week grid of expected receipts and known payments, rolled forward every Monday. Known payments means wages, rent, VAT, PAYE, loan repayments and standing orders. Expected receipts means invoices due, discounted by who actually pays on time.
- Your lowest point: not your balance today, but the lowest number the forecast reaches in the next quarter, and the week it happens in.
- The committed-but-unspent: purchase orders raised, stock ordered, the quarter's VAT accruing. Money that is gone but has not left yet.
The thirteen-week forecast is the one that changes behaviour. It will show you that the trouble is week seven, which gives you six weeks to arrange an overdraft, chase three invoices, or delay a piece of equipment. Finding out in week seven gives you nothing.
The month the wages are due
When the gap arrives anyway, the order of operations is unglamorous and it works.
Chase first. Most late payment in Britain is not dispute, it is a supplier who has never been chased and a purchase ledger that pays the noisy ones. A phone call to the person who signs off, not an email to accounts, moves more money than anything else you can do in an afternoon.
Then talk to HMRC before the deadline, not after. HMRC operates Time to Pay arrangements for VAT, PAYE and Self Assessment, and businesses that ring up in advance with a realistic proposal are treated very differently from those that simply miss a payment. Interest applies, but it is far cheaper than enforcement.
Then talk to suppliers, individually and honestly, with a date. Then look at invoice finance, which advances a proportion of your unpaid invoices for a fee, and which is expensive but exists precisely for this. Never pay wages last. Employees who are paid late leave, and you replace them at the cost set out in every recruitment budget you have ever seen.
The thing worth internalising is that profit is a measure of whether the business is worth running and cash is a measure of whether it is still running. A business can survive a bad year of profit. It cannot survive one Friday without the wages.
Where this shows up in the game
Business Baron keeps the profit and loss account and the bank balance as two separate screens for exactly this reason. You can have a strong trading year on paper and still be looking at a payroll you cannot meet, usually because you took on a big contract or bought stock for a season that had not arrived yet. Across more than two hundred business types, the cash cycle differs: a café is funded by its customers, a contractor is funding his. Most players learn this in their second year, and a café in the free game teaches it as well as anything.