Start with the timing of receipts and payments

Sending an invoice and receiving the money are separate events. If customers pay after you have paid delivery costs, the business funds that gap. The amount outstanding can increase as sales grow, even if customers continue to pay within their agreed terms.

Check expected collection dates as well as invoice due dates. A disputed invoice or a customer who pays on a particular monthly cycle may have different cash timing from the terms shown in your accounting system. Keep that distinction visible in a forecast.

A simple example of profit without the cash yet

HYPOTHETICAL EXAMPLE

A service business completes and invoices £20,000 of work. Assume it recognises that revenue and £12,000 of related costs in the same period. The costs are paid immediately, but the customer has not paid by period end.

The work contributes £8,000 of profit before other expenses, while those transactions reduce cash by £12,000 in that period. When the customer pays later, the cash position changes. This example excludes VAT, tax, other expenses and other transactions.

The two figures answer different questions. One describes revenue and recognised costs; the other describes the timing of money moving through the bank. A profitable business still needs to understand that timing.

Look beyond customer payments

Stock purchases can use cash before the related goods are sold. Equipment purchases can also affect cash differently from the expense recognised in a single period. Loan principal repayments and distributions are further examples of movements that need to be understood separately from trading profit.

These are possible explanations, not a diagnosis of your business. Reconcile the opening and closing cash position to actual movements, and ask your finance team to explain any material items you cannot connect to the management accounts.

A useful distinction is between a timing difference, a planned investment and a continuing trading problem. They can look similar in the bank balance but lead to different management discussions.

A practical checklist for your next finance review

  1. Confirm the starting cash position. Use reconciled balances and a clear reporting date.
  2. Review outstanding receipts. Separate expected collections, overdue balances and disputed amounts.
  3. List committed payments. Include recurring costs and known larger payments, with dates.
  4. Identify other cash movements. Look for investment, financing and movements not explained by trading profit alone.
  5. Build the forward view. Map the expected receipts and payments, then test what changes if an important receipt arrives later.

A forecast should distinguish known amounts from assumptions. If an expected payment date changes, update the outlook rather than leaving the original figure in place because it appeared in the first version.

Check whether growth is increasing the gap

A larger contract may require more stock, delivery capacity or staff before the first receipt arrives. A plan can therefore improve expected revenue while increasing the amount of cash tied up in the business.

Connect the operational plan to timing: when do costs start, when can work be invoiced and when is payment expected? A financial model can explore those relationships, while a shorter cash forecast can show the immediate pressure points.

If the underlying issue is that work earns too little after delivery costs, a profitability review addresses a different question from cash timing. In some businesses, both need attention.

Bring a specific question to the conversation

“We make a profit but cannot explain the cash movement” is a useful starting point. So is “we are planning to grow and want to see the cash required before receipts arrive.” You do not need to arrive with a finished spreadsheet.

Our cash flow forecasting service can help define the information needed, test assumptions and establish a review process with your team.

Further reading: the Australian Government’s cash flow resources cover general receipts, payments and timing concepts. They are not UK tax guidance.