Why Is My Business Profitable But Running Out Of Cash?

Claire Hancott
7 days ago
5 min read

You are making good money. The sales are coming in, the profit and loss looks healthy, and yet every time you check the bank account there is less in there than you expected. You cannot work out where it is going. You are not spending recklessly. The business is not losing money. But the cash just never seems to be there.

This is one of the most common and most frustrating experiences for growing business owners. And the reason it happens is almost never what people think it is.

There is a number hiding in your accounts right now that explains the gap. Most business owners have never been shown it. Most accountants have never pointed it out. But once you see it, you cannot unsee it.

Listen to the podcast episode that inspired this post:

Episode 118 - Finding The Hidden Cash In Your Business

Why Profit And Cash Stop Moving Together

When your business is small, profit and cash are roughly the same thing. You make a pound of profit and it lands in your bank account. Simple.

As the business grows, that stops being true. Profit gets made but the cash does not arrive at the same time, or sometimes at all. It gets absorbed by the business before you ever see it.

This is not a sign something is wrong. It is a sign the business is growing. But it is also a sign that you need a different way of looking at your finances, because the profit and loss statement alone is no longer telling you the full story.

The Number You Need To Know: The Gap Between Equity And Cash

Go to your balance sheet. Find two numbers.

The first is your total cash balance. Add up every bank account the business holds, including any tax accounts or savings pots sitting separately. That is your cash.

The second is your equity. You might see it labelled as shareholders equity, capital and reserves, retained earnings, or owners funds. It sits at the bottom of the balance sheet. This number represents all the profit your business has made over the years that has not yet been paid out to you as dividends. In other words, it is all the money the business has earned that is still sitting inside the business rather than in your pocket.

Now subtract your cash from your equity.

If you get a positive number, which most growing businesses will, it means there is money tied up in your business that should theoretically be yours but that you cannot access because it is not sitting as cash. If that number is £200,000, there is £200,000 of your money locked inside the business. If it is £500,000, half a million of your money is tied up somewhere.

This is the gap. And closing it is where significant cash gets freed up.

Where Is The Money Actually Hiding?

Once you know the size of the gap, the next question is where that money is sitting. The most common places are these.

Debtors

Customers who owe you money. You have raised the invoice, recognised the profit, but the cash has not arrived yet. For businesses with slow-paying customers or long payment terms, this can be enormous. The profit is real but it is sitting in someone else's bank account.

Stock

If you hold physical products, every pound of stock on your shelves is a pound of profit that has been converted into something that is not yet cash. One business owner built an Amazon reselling business entirely from reinvested profits and ended up with a million pounds of stock and almost nothing in the bank. Every penny he earned went straight back into inventory.

Fixed assets

Vehicles, equipment, computers, machinery. If you paid cash for any of these, or put down a deposit, that money came out of your business and turned into a physical asset. The value is still there, but it is not liquid.

Payments made early

This one is subtle but surprisingly common. A bookkeeper pays supplier invoices on the invoice date rather than the due date, and ten thousand pounds leaves the business six weeks earlier than it needed to. Multiply that across a year and across multiple suppliers and the impact is significant.

What You Can Actually Do About It

Knowing the gap exists is the starting point. Closing it is where the real work happens, and it is the kind of work that a good financial controller focuses on month by month.

Speed up what comes in

Look at your debtors. Which customers consistently pay late? What is your credit control process? Are you in contact with customers regularly, or only chasing when the invoice is well overdue? Getting one or two large customers to pay two weeks earlier can move the dial meaningfully.

Slow down what goes out

Are you paying suppliers on invoice date rather than due date? Most supplier payment terms give you 30 days. If you are paying on day one, you are giving away free working capital. Pay on the due date, not before.

Finance your assets rather than buying them outright

If you have paid cash for vehicles or equipment, you have turned liquid cash into fixed assets. Refinancing those assets, even at modest interest, can release significant cash back into the business. One approach that works well for businesses that are underleveraged is to refinance existing debts over a longer period, which slows cash going out and frees up working capital month to month.

Reduce stock levels where possible.

If you hold inventory, look at minimum viable stock levels. Every pound of unnecessary stock is a pound that could be sitting in your bank account instead.

These are not dramatic interventions. They are the kind of 1 to 2 percent gains that, compounded across twelve months, add up to something that genuinely changes the financial position of the business. Finding one customer who pays you a month earlier. Catching a supplier payment that went out six weeks early. These feel small in isolation. They are not small when you look at the cumulative effect.

A Quick Test You Can Do Right Now

Ask your accountant two questions. First, what is my current gap between equity and cash? Second, why does that number matter?

The answers will tell you a lot. If your accountant can explain it clearly and connect it to your business specifically, that is a good sign. If they look blank, or give you a generic answer, that is a signal worth paying attention to.

If you want to find the number yourself, you do not need up-to-date management accounts to do it. Your most recent year-end accounts will give you a rough version of the number. Look at the equity figure on the balance sheet and the cash figure. The gap tells you the opportunity.

One Important Caveat If You Are Thinking About Selling

Everything above applies if your focus is on growing the business, freeing up cash, and improving your working capital position.

If you are thinking about exiting the business in the next few years, the strategy is different. A large gap between equity and cash, particularly if it is made up of debtors or fixed assets, can actually be attractive to a buyer because it represents an opportunity for them to release funds after acquisition. In that scenario, you may want to hold the gap rather than close it, and factor it into your exit valuation conversation.

The right approach depends on where you are heading. But either way, knowing the number is the starting point.

Want to know what your equity to cash gap is? If you can share your year-end accounts or give access to your Xero, We can run the number for you and give you a sense of the opportunity. Get in touch here.