Profitable on Paper, Short of Cash: What Your Accounts Should Tell You

A company can report a profitable month and still struggle to meet the next payroll. Revenue has been earned, costs have been recognized, and the accounts show a positive result. The cash needed to meet payment commitments may arrive several weeks later.

The gap is often explained by unpaid invoices, inventory, or payments for equipment and debt. What matters is whether it is temporary, how it will be funded, and whether the same pressure will return as the business grows. Monthly reporting should make those distinctions clear.

For an owner-managed business in Bulgaria, that explanation has direct consequences for hiring, investment and payment terms. Whether the company is a consultancy in Sofia or a trading business in Varna, the owner needs to understand how much cash its next decision will require and when.

What is the difference between profit and cash flow

Profit is revenue less expenses recognized for the period. Cash flow is the money actually moving into and out of the business. The difference matters as soon as you deliver work today and agree to be paid later.

Take a completed project that the customer will pay for in 60 days. Under accrual accounting, the revenue may already belong in this month’s results. Your team still expects to be paid at the end of the month. Until the customer settles, your business has to fund that gap.

A cash flow statement explains cash movements through operating, investing and financing activities. The indirect method adjusts profit for non-cash items and timing differences, as outlined in the IFRS Foundation’s overview of IAS 7 Statement of Cash Flows.

Other payments work differently again. Buying equipment uses cash now, while its cost may be spread over years through depreciation. Repaying loan principal reduces the bank balance without being an expense in the profit and loss account. Interest is accounted for separately.

Where cash gets tied up

Unpaid customer invoices

Customer balances are a sensible starting point. The total shows how much is owed; the payment history and status of each invoice indicate when it is likely to be collected. A large invoice within agreed terms and a disputed invoice three months overdue require different assumptions in the cash forecast.

Inventory and unfinished work

A discount for a larger order can improve the purchase price while putting pressure on liquidity. Buying six months of stock instead of two commits funds that may be needed elsewhere before the goods are sold. The decision depends on the savings, expected sales, and the cost of holding the additional inventory. In a service business, work awaiting customer approval can create a similar funding gap by delaying billing after delivery costs have already been incurred.

Payments outside the headline profit figure

The review also needs to cover commitments beyond day-to-day trading. Equipment purchases, loan principal repayments and distributions to owners can reduce cash without reducing the current period’s profit by the same amount. Tax payments also belong in the forecast. A bank balance already committed to approaching liabilities leaves limited capacity for new expenditure.

An example of profit without available cash

Consider a Bulgarian service company with the following monthly results. This is an illustrative example, excluding VAT, tax, depreciation and financing movements to isolate the effect of customer payment timing.

It starts the month with €20,000 in cash and no outstanding customer invoices. During the month, it completes and invoices €50,000 of work. Its operating expenses are €35,000, all paid in the same month. Customers pay €20,000 of the new invoices.

The company has earned €15,000, but its customers still owe €30,000. That increase in receivables explains the cash movement: a €15,000 profit, less €30,000 in unpaid invoices, leaves a €15,000 cash outflow. The opening €20,000 has been reduced to €5,000.

The immediate issue is whether the outstanding €30,000 will be collected before the company’s next commitments fall due. If not, management must address the funding gap. For future contracts, deposits or milestone billing may reduce the amount the business has to finance. Additional sales on the same terms could increase the shortfall: delivery costs rise before the related receipts arrive.

Five figures that belong in the monthly review

1 Operating profit margin

Operating profit divided by revenue, multiplied by 100, shows the operating margin. Keep the calculation consistent across periods. If sales are rising while the margin falls, establish whether pricing, delivery costs or overheads explain the change. Slow collection and inadequate margins can both put pressure on cash, but they require different decisions.

2 Operating cash flow

Operating cash flow shows the cash generated or consumed by the company’s operating activities. Review it separately from borrowing, owner funding and asset purchases. An owner’s cash injection may cover an immediate shortage while leaving the underlying cause unresolved. Recurring differences between profit and operating cash flow deserve particular attention, supported by a reconciliation of the main movements.

3 Overdue receivables

Divide overdue trade receivables by total trade receivables and multiply by 100, using the same VAT basis. If there are no receivables, the ratio is not applicable. Review the percentage alongside the overdue amounts and an aging report. Each significant overdue invoice needs a responsible person, a next action and a realistic collection date. Recording that a customer has been contacted is not enough to support a forecast receipt.

4 Cash tied up in the operating cycle

Trade receivables plus inventory minus trade payables provides a useful starting measure of operating working capital. An increase generally indicates more funds committed to trading, although write-offs and other non-cash movements should also be considered. Service businesses should assess unbilled work and customer advances. Always examine the reason for a change: a lower balance due to overdue supplier payments does not constitute a sustainable release of cash.

5 The lowest cash balance in your forecast

A weekly forecast covering the next 13 weeks shows when cash is likely to come under pressure. Use realistic collection dates and include expected payments for payroll, suppliers, taxes, debt service and planned investment. Compare the lowest forecast balance with the minimum cash buffer the business needs. Then test a delay in the largest expected customer payment. A shortfall in that scenario may justify revising payment terms or arranging funding before it becomes urgent. Review the forecast monthly and update it weekly when liquidity is tight.

What monthly accounts should enable you to decide

A useful monthly reporting pack brings the profit and loss account and balance sheet together with a cash flow explanation, receivables aging and a short-term forecast. Bank accounts need to be reconciled and material costs recognized in the correct period. Agree a reporting date that leaves time to act on the findings.

The review should resolve specific decisions. Can a planned purchase proceed without relying on an uncertain customer receipt? Does a new contract require a deposit? Will a proposed hire remain affordable if collections slow? These questions expose the assumptions behind a decision before the company commits to it.

My view is that this is where financial advisory earns its place alongside accounting: in testing whether a commercially attractive decision can be funded on realistic terms. The value lies in the judgment applied to the figures and the action that follows.

At the next monthly review, ask for a clear explanation of the movement from opening cash to closing cash. Where the difference is tied up in customer balances, establish the expected collection dates and the commitments falling due before then. That is the information an owner needs to decide whether to proceed, postpone or arrange funding.