Why Your Profit & Loss Statement Doesn’t Tell the Full Story

You might look at your Profit & Loss (P&L) statement and think, “Great! My business is profitable, so I should have plenty of cash.” Then, you check your bank account and… it tells a different story. Or worse, a few months down the line, your cash flow situation takes an unexpected turn. Why does this happen?

Accrual Accounting vs. Cash Reality

The key reason is accrual accounting. In business accounting, we record income and expenses as they happen, not necessarily when the cash moves in or out of your bank account. This means:

✔ You may have sales on paper, but if customers haven’t paid yet, that cash isn’t in your bank.

✔ You may owe suppliers for goods or services you’ve already received, even if the payment isn’t due yet.

✔ Some expenses—like taxes or annual insurance premiums—only hit your account once a year or quarterly, making it easy to overlook upcoming cash outflows.

Why You Need a Rolling Cash Flow Forecast

A rolling cash flow forecast is essential for staying ahead of financial surprises. Ideally, you should forecast at least 13 weeks ahead—or even a full year if you have a budget. This helps you:

🔹 Identify periods where you may run short on cash and need to take action.

🔹 Plan for large expenses, such as tax bills or supplier payments, so they don’t catch you off guard.

🔹 Ensure you always have enough to pay suppliers and employees on time.

How to Stay in Control of Your Cash Flow

To avoid running into trouble, make sure you:

✔ Regularly review who owes you money and chase overdue payments.
✔ Keep track of upcoming payments you owe and set aside funds in advance.
✔ Maintain a buffer for low sales months, so you’re not scrambling to cover expenses.
✔ Use cash flow forecasting tools to gain a clear picture of where your business stands.

At the end of the day, profitability doesn’t mean liquidity. Understanding your cash flow ensures your business stays financially stable—not just on paper, but in reality.

10 Quick Tips to Improve Your Cash Flow 💸

1. Shorten Your Payment Terms
   Set your invoices to 7 or 14 days instead of 30 or more. Faster due dates mean faster cash in your bank.

2. Invoice Promptly and Accurately
   Send invoices immediately after delivering a product or service. Mistakes or delays = delayed payments.

3. Bill in Advance Where You Can
   For projects or ongoing services, invoice upfront or ask for deposits. This keeps you cash-positive from the start.

4. Set Up Direct Debit
   Make it easy for customers to pay on time. Direct Debits help you collect automatically — no chasing, no stress.

5. Use Your Suppliers’ Payment Terms
   Negotiate the longest payment terms possible with your suppliers. Stretching your outgoings gives you more breathing room.

6. Consider Short-Term Finance
   A loan or flexible credit line can cover temporary gaps and keep operations running smoothly — just use it smartly.

7. Keep a Tight Eye on Debtors
   Set up reminders, regular follow-ups, and clear overdue processes. Don’t let unpaid invoices pile up.

8. Forecast Cash Flow Regularly
   Know your upcoming ins and outs. Spot cash crunches early — not when it’s too late to fix.

9. Cut Unnecessary Costs
   Review your expenses regularly. Even small savings add up and improve your buffer.

10. Sell Old Stock or Assets
    Free up cash that's tied up in slow-moving inventory or unused equipment.