Profitable but Cash-Strapped? Here’s Why and How to Fix It

Ever look at your P&L report and wonder why it shows a profit, but your bank account tells a different story? If your business is cash-strapped and unable to pay bills on time or invest in your business, you’re not alone.

Are you scrambling to make payroll every week or stretching out vendor payments longer than their terms? How can your business be profitable but still struggle with cash flow?

Many business owners think profits and cash flow are the same thing, but they’re not. Let’s break it down:

• Profit is your revenue (sales) minus expenses.
• Cash Flow is the money moving in and out of your business. Positive cash flow means more money coming in than going out. Negative cash flow means you’re spending more than you’re bringing in.

A U.S. Bank study found that poor cash flow is the reason 82% of small businesses fail. So, while high profits are great, low cash flow can still sink your business.

Fixing the Disconnect: Where to Look

Accounts Receivable

Start by examining your accounts receivable (AR):

• Are your AR higher than your accounts payable (AP)? That’s good.
• Do your customers have longer payment terms than your vendors? That’s bad.
• Offer incentives for early payments. Discounts can encourage customers to pay in 10 days instead of 30-60.
• Check if vendors offer discounts for early payments and take advantage of them.
• Review the age of your receivables. How much is over 90 days?
• What’s your write-off percentage for unpaid receivables?

Giving a customer terms to pay your invoice is no different than your bank giving you a short term loan. What kind of due diligence do your undertake before you extend credit:

• Get a personal guarantee from the business owner.
• Charge late fees or interest on overdue accounts.
• Secure your receivables with collateral and file a UCC financing statement.

To remedy cash flow issues, get control of your receivables to ensure you have money coming in on time from your customers.

Lending Relationship

A solid banking relationship is crucial:

• Do you have a Line of Credit (LOC)? Is it enough to cover your sales and receivables? If not, it is time to sit down and renegotiate your Line of Credit.
• If you have no LOC to finance your receivables, make an appointment with a lender to explore the options to meet your needs.
• Keep your financial reports up to date. Lenders need to see current tax returns, balance sheets, and income statements.
• Ensure you have enough collateral and good personal credit.

Lenders are strategic partners in your business growth and survival and are mainly concerned with your ability to pay them back. Make sure you can build that type of trust. Without them, it could mean the difference of growing or staying stagnant.  It could also mean the difference between staying in business and going out of business.

Employees

Your employees are probably your company’s most valuable asset. Without them, you will not survive.  In order to retain them, they need to be paid timely and provided incentives to stay working for you.

Unless you are a one-person business, this should be your first concern. Also:

• If cash flow is tight, how long can you pay your employees and not take a paycheck yourself?
• As the owner, if you loan the company money personally, how long before you run out of money? Personal loans to your business should be a last resort.

Poor cash flow can force you into tough decisions, like delaying necessary hires or keeping underperforming employees because you can’t afford the cost of hiring and training new ones.

Key Takeaway

Profits alone don’t keep a business running—cash flow does. Managing cash flow is critical, especially for small-to-medium businesses that reinvest profits into marketing or inventory. If you’re cash-strapped and struggling with cash flow, it might be time to get a comprehensive business assessment and professional help.

By addressing these areas, you can turn your profitable business into a cash-positive one.