Why you have profit but little cash
Profit tells you whether you sell above your costs; cash, whether there is money in the bank. If customers pay late or you buy more stock, you can make money and still run short of cash. See which items explain the difference.
From profit to cash
| Item | Effect on cash |
|---|
Why your business makes a profit but has no cash
Enter the profit for the period and how much receivables, inventory and payables changed over that time, plus capital spending, loans and owner withdrawals. The calculator bridges from profit to the change in your cash and shows which item weighs most.
Example: you provide a service for 10,000 with 6,000 of costs already paid: you make 4,000. But if the customer has not paid yet, receivables rise by 10,000 and your cash falls by 6,000.
How it is calculated
- Operating cash = profit + depreciation − increase in receivables − increase in inventory + increase in payables.
- Investing cash = − capital spending paid.
- Financing cash = new loans − loans repaid − owner withdrawals. Change in cash = the sum of the three.
Assumptions
- Changes are for the same period as the profit. If an item falls, enter it as a negative number (for example, −1,000).
- Profit after tax, as shown in your accounts.
Frequently asked questions
Why do I have profit but no money in the bank?
Because profit counts sales when they are made and cash counts them when they are collected. If you sell on credit, buy stock or pay for equipment, money goes out before the profit comes in.
What is depreciation and why is it added back?
The accounting expense that spreads the cost of a machine or equipment over several years. It reduces profit but does not leave the bank that year, so it is added back to reach cash.
How do I enter an item that went down?
As a negative number. For example, if customers owe you 1,000 less at the end of the period than at the start, enter −1,000: you collected more than you sold and your cash rises.
What can I do to have more cash?
Collect sooner (invoice promptly, ask for deposits), hold less stock, negotiate longer supplier terms and finance capital spending over the long term instead of paying it from day-to-day cash.
How is this different from a cash flow forecast?
This calculator explains what has already happened, using your accounts. The 13-week cash flow forecast looks ahead using the receipts and payments you expect.