Profit tells you whether a business made money over a period, while cash flow tells you whether it can pay its bills on time, and a profitable business can still run short when customers pay more slowly than payroll, vendors and taxes come due. The way to stay ahead is a rolling 13-week cash forecast that shows each gap weeks before it arrives.
A business can be profitable on paper and still struggle to make payroll. Cash flow is about timing: when money arrives compared with when it has to go out. Even a few weeks of mismatch can strain a business that is otherwise healthy, and seeing that mismatch in advance is most of the battle.
Why profit and cash are not the same thing
Your profit and loss statement records revenue when you earn it and expenses when you incur them. Your bank account only cares when money actually moves. The gap between the two comes from a handful of predictable places:
- Receivables. You have invoiced the work, but the customer has not paid.
- Inventory. You have paid for goods that are still on the shelf.
- Loan principal. Only the interest reduces profit, but the whole payment leaves the account.
- Equipment and vehicles. The purchase is paid now, while the deduction may be spread over several years.
- Owner distributions and taxes. Neither appears as an operating expense, but both take cash.
When an owner says the business is doing well but money feels tight, one or more of these is almost always the reason.
Where Colorado businesses feel the squeeze
The pattern shows up across industries, and Colorado adds a few of its own.
A contractor finishes a large job in March and is paid in May, while payroll and suppliers were due in March. A Front Range retailer buys holiday inventory in October and sells most of it in December. A professional services firm lands a major client and starts delivering immediately, but the client pays invoices in 60 days. And in mountain towns like Estes Park, a restaurant or shop may earn most of its year in the summer months and still carry rent, insurance and a core staff through the winter.
None of these businesses is failing. Each has a cash gap that is entirely predictable if someone is looking for it.
What a cash gap looks like in numbers
For example, a contractor takes a $150,000 job expected to take six weeks. Materials of $45,000 are due to the supplier 30 days after delivery. Crew labor of about $40,000 is paid every two weeks while the job runs. The customer pays 60 days after the final invoice.
On paper, the job earns $65,000 before overhead. In the bank, the contractor pays out $85,000 before the first dollar arrives, and the payment does not come in until roughly week 15. Take on two jobs like this at once and the business needs $170,000 of cash to carry them, while its profit and loss statement shows a strong quarter. These figures are illustrative, but the shape is familiar to anyone who has run a project-based business.
A framework you can use: the 13-week cash forecast
The simplest tool for staying ahead of cash gaps is a rolling 13-week forecast. It fits on one spreadsheet and takes about an hour to build the first time.
- Start with today’s bank balance. Use the actual figure, not the one in your accounting software if the two differ.
- List expected cash in, week by week. Base collections on when customers actually pay, not on their invoice terms.
- List cash out, week by week. Payroll on its real dates, rent, loan payments, major supplier bills, sales tax remittances and estimated tax payments.
- Calculate the ending balance each week. Any week that dips below your minimum comfortable balance is a gap to plan for now.
- Update it every week. Replace last week’s estimates with actual figures and add a new week at the end.
The forecast does not have to be precise to be useful. Its job is to show you the low point while there is still time to do something about it.
What can you do about a gap you see coming?
Once you can see a gap, you have options that are not available in a crisis.
Speed up what comes in. Take deposits on large jobs, bill in stages rather than at completion, invoice the day work is delivered and accept electronic payments, which usually arrive faster than checks.
Time what goes out. Ask suppliers for terms that match your collection cycle. Take early-payment discounts only when the forecast shows the cash can spare it.
Arrange financing before you need it. A line of credit is easier to get while the books are current and the business is healthy.
Set aside taxes as you go. Individuals, including owners of pass-through businesses, generally need to make estimated tax payments if they expect to owe $1,000 or more for the year, and corporations if they expect to owe $500 or more, according to the IRS estimated tax guidance. The year is divided into four payment periods, so build those dates into the forecast. Treat sales tax you collect the same way: it belongs to the state and city, not to your operating account.
Build a seasonal reserve. For seasonal businesses, the strong months have to fund the slow ones. Estimate fixed costs for the off-season and move that amount into a separate account as the peak months come in.
Know your runway
One number ties all of this together: how many weeks the business could cover its costs if revenue slowed sharply. Divide cash on hand by your average weekly net outflow in a slow period. If the answer makes you uncomfortable, you have found the place to start.
How SBA CPA helps with cash flow
We look at more than the tax return. Our accounting and virtual CFO work focuses on where money comes from, where it goes and what that means for the decisions in front of you, with a dedicated team that knows your business and flags issues early. If cash feels tighter than your profits suggest it should, an introductory call with our client services team is a simple way to talk through what you are seeing.
Common questions
Why does my business show a profit but have no cash?
Profit and cash move on different schedules. Sales you have invoiced but not collected, inventory on the shelf, loan principal payments, equipment purchases and owner distributions all use cash without reducing profit the same way. A cash flow statement or a simple forecast shows where the difference went.
What is a 13-week cash flow forecast?
It is a week-by-week projection of cash coming in and going out over the next quarter, starting from today's bank balance. Thirteen weeks is long enough to see payroll cycles, rent, loan payments and tax deadlines, and short enough to forecast with reasonable accuracy. You update it weekly by replacing estimates with actual figures.
How much cash reserve should a small business keep?
There is no single right number. A common starting point is enough to cover two to three months of fixed costs, such as payroll, rent and loan payments, and more for seasonal businesses, which need to carry fixed costs through the slow months. The right figure depends on how predictable your revenue is and how quickly you can cut costs.
When should I apply for a line of credit?
Apply while the business is healthy and the books are current, not when cash is already short. Lenders look at recent financial statements and tax returns, and approval is easier and terms are better when you do not urgently need the money.