The short answer
Profit and cash flow are not the same thing. Statutory accounts are prepared on an accrual basis, so they record income when you invoice and costs when you receive the bill, not when money moves. A business can show a healthy profit and still run short, because customers pay late and tax falls due in lumps.
The fix is to see cash coming and going every month: monthly management accounts that show where margin is going, a 13-week cash flow forecast that warns you weeks before a dip, and credit control so customers pay on the terms you agreed.
Want to see your own working capital? Monthly management accounts show your margin, overheads and receivables every month. See how the monthly service works.
How can a business show a profit and still be short of cash?
It is a scenario far too many Maltese business owners face. Your accountant sends the year-end draft accounts, and the bottom line shows a solid profit of €80,000. You should be celebrating. Instead, you check the business bank account and the balance is close to zero. A quarterly VAT payment is due in two weeks, payroll runs at the end of the month, and a supplier is chasing an overdue invoice.
Both things are true. The profit is real on paper, and the cash is real in the bank. The gap between them is where many Maltese businesses get into trouble.
Why does profit look better than cash?
Under the accounting frameworks used for most Maltese companies, such as GAPSME and IFRS, financial statements are prepared on an accrual basis. That means revenue is recognised when you issue the invoice, not when the client pays, and expenses are recognised when you receive the bill, not when the cash leaves your account.
Take a €30,000 fit-out, IT integration or consulting project completed in September, with the invoice issued on 30 September. Your profit and loss account records €30,000 of revenue straight away. In reality, wages, materials and subcontractors were paid in cash during September. If the client works on 60- or 90-day terms, you are financing their operations until December or January.
This is how a business can grow itself broke: by taking on profitable work faster than its cash inflows can support.
What drains cash in Maltese SMEs?
In a small, relationship-driven market, cash usually leaks through three bottlenecks.
Customers who pay late
Chasing payment can feel uncomfortable, and many directors hesitate to follow up for fear of damaging a good relationship. Terms of 30 days quietly stretch to 75, 90 or even 120 days, especially with larger corporate clients and public bodies. Every day an invoice stays unpaid is cash you cannot use to pay your own bills or invest in growth.
Cash tied up in stock and unbilled work
In wholesale, retail, manufacturing or fleet operations, profit can sit in stock in a warehouse or yard. In service and contracting work, cash gets trapped in work in progress: hours and project milestones that have been done but not yet billed, because the billing schedule was never finished. Your profit reflects the margin on completed jobs. Your bank account reflects the stock and the unbilled labour sitting idle.
Tax and VAT that arrive before the cash does
Statutory payments do not line up neatly with your cash cycle. VAT at the standard rate of 18% is charged on your sales invoices, and the quarterly return falls due whether or not your customer has paid yet. Company tax is paid partly in advance through provisional tax during the year, and the balance can arrive as a lump sum. Without a reserve set aside as the money comes in, each payment feels like a new shock.
Why compliance accounts don't help you run the business
Many Maltese SMEs work only with compliance accounting. They hand a folder of receipts, bank statements and sales invoices to an accountant once a quarter or once a year, just to file the VAT return and the annual financial statements.
Compliance accounting looks backwards. It satisfies the tax authorities and the Malta Business Registry, but it tells you very little about the business while you are running it. By the time it arrives, the decisions that would have protected your cash have already been made.
What closes the gap?
Three things, used together, turn cash from a surprise into a plan.
Monthly management accounts
A monthly profit and loss account, balance sheet and set of key figures, delivered each month soon after the month closes. They show gross margin by revenue stream, overheads creeping upwards, and how old your receivables are, so a problem shows up in the month it starts.
A 13-week rolling cash flow forecast
This maps expected collections against committed payments: payroll, rent, supplier batches, VAT and provisional tax. Updated every week, it highlights a cash dip six to eight weeks before it happens. That gives you time to collect a receivable or renegotiate a term, rather than funding the business in a panic.
Credit control and billing discipline
Clear payment terms on every quote and invoice, milestone invoicing on larger jobs, and automatic payment reminders built into your accounting software. Most late payment is not refused. It is simply not chased on time.
Stop guessing. Start managing your cash. A profitable business can still go under if it runs out of cash on a Friday afternoon. Get in touch to review your working capital and build a cash flow forecast that gives you peace of mind.
Frequently asked questions
Why is my business profitable but short of cash?
Profit is recorded when you invoice and when costs are billed, while cash moves when customers pay and when you pay suppliers, staff and the tax authorities. Late payment, stock, unbilled work and lump-sum taxes all widen the gap between the two.
What is a 13-week cash flow forecast?
It is a rolling forecast of the cash coming in and going out over the next 13 weeks, updated every week. It shows when the bank balance is likely to dip, so you can act while there is still time.
What are debtor days?
Debtor days measure how long, on average, your customers take to pay. Divide trade debtors by annual credit sales and multiply by 365. A figure well above your agreed payment terms means cash is being held back by customers.
How often should I review my cash position?
Weekly for the bank balance and the next few weeks of payments, and monthly for the full picture through management accounts. Waiting for the year-end accounts is too late to protect cash.
Want help with your cash position? I offer monthly management accounts preparation and advisory support for Maltese businesses. Monthly accounts or get in touch.