Your business is profitable so why is your bank account empty?

Profit

Profit is the money left over after you have paid your costs. There are two levels of profit to understand.

Gross Profit is your income minus the direct costs of producing your goods or services. So if you are a builder, your profit is your revenue minus the cost of materials and subcontractors.

Net Profit goes a step further. It takes gross profit and deducts all your other business running costs: rent, rates, utilities, insurance, professional fees, marketing and so on.

Gross profit shows you whether the core of what you do is financially viable.

Net profit indicates whether your business is making money after all expenses are accounted for and paid.

Why profit matters

Profit matters because it measures commercial success over time. It feeds into your tax liability, signals to lenders and investors that the business works, and tells you whether your pricing and cost structure are in good shape. Without profit, a business cannot grow, reward its owner, or survive in the long term.

Cash Flow

Cash flow is the movement of money in and out of your business over a given period. It tracks when money goes into and leaves your bank account.

Why cash flow matters

Cash flow matters because bills, wages, and supplier invoices do not wait for your customers to pay you. If there is a time gap between money going out and money coming in, the cash flow won’t allow you to operate.

How cash flow and profit work together

Profit is measured over a month, a quarter, or a year. Cash flow is measured on a day-to-day basis as monies are received and paid out.

You may have a job or sale that will give you £5000 in profit, but if the payment is received after all the costs have been paid, you can end up with a cash flow issue despite the profit.

This means you need both profit and cash flow to keep your business healthy.

How to improve profit

Start with your pricing. It sounds simple, but many business owners have not reviewed their rates in years, and costs have a habit of creeping up while prices stay still. If your margins are tighter than they used to be, pricing is usually the first place to look.

Alongside that, go through your costs line by line. Some expenses are fixed and unavoidable, but others can be renegotiated or removed entirely without any impact on the quality of what you deliver.

It is also worth planning ahead for seasonal dips. If you know certain months are quieter, building that into your budget means you are not caught short when it happens. The same

applies to one-off costs like equipment servicing, software renewals, and maintenance. These are predictable expenses, and treating them as surprises is avoidable.

How to improve cash flow

The single biggest lever for most small businesses is payment terms. If you are giving clients 30 or 60 days to pay, look at whether that is actually necessary, or whether it is just habit. Tightening terms, asking for deposits on larger jobs, or simply chasing invoices more promptly can make a significant difference without changing anything else about the business.

Tax deadlines are another area where a little forward planning goes a long way. VAT quarters, self-assessment payments, and corporation tax all land at predictable points in the year, so there is no reason for them to come as a shock to your bank balance.

Finally, be thoughtful about growth. Winning more work is a good problem to have, but it often means spending on materials, staff, or stock before the income arrives. Understanding that lag and planning for it is part of managing cash flow well.

What to do when it goes wrong

The first thing to do is to act early. There is no point in hoping that things will resolve. Having a great relationship with your accountant and undertaking regular reviews against your business plan will give you early warning that things are going wrong, and allow you to take action immediately.

• If cash flow is under pressure

Understand the position. Look at the next four to eight weeks to understand exactly what will be leaving your bank account and what will be coming in.

From there, you can manage any outstanding payments due to you and immediately review payment terms for future work.

It is always worth being honest with suppliers and providers and asking whether their payment terms and dates are flexible.

• If profit is declining

Make sure you have up-to-date monthly or quarterly management accounts that let you spot trends and respond before the problem becomes too big to solve.

Review your margins to see whether it is a price or cost issue.

Review whether different lines or services offer different profit margins, and adjust your offer to ensure the activity is where the profit is.

• Talk to your accountant

A good accountant will help you understand the figures, identify where change is needed, and keep you up to date so any serious problems can be headed off early.

Next Steps

If you need further help understanding the difference between profit and cash flow, get in touch with Hayley today for a chat. Please call the office on 01473 657853 to arrange a convenient time to discuss how we can support you and your business.