Book contents · Chapter 6 of 11
A business runs short of cash when money leaves before it arrives: suppliers and wages are paid this month, customers pay in sixty or ninety days, and VAT, tax and social security fall due in lumps. The fix is to forecast cash weekly for the next thirteen weeks, put VAT and tax money aside as it is earned, and manage the few things that tie cash up: debtors, stock and margin.
What are the warning signs of cash flow problems?
Sound familiar? These are the signs owners describe most often.
- The bank balance swings and you are never quite sure why.
- VAT or provisional tax payments feel like a shock every time.
- You were profitable on paper but still needed an overdraft.
- Big new jobs make cash tighter, not easier.
- You delay paying yourself or your suppliers to get through the month.
Why does a profitable business run out of cash?
Profit and cash arrive at different times
A sale counts as income on the day it is invoiced. The money may arrive two or three months later. Wages, rent and suppliers do not wait that long, so a busy, profitable month can empty the bank account.
Tax and VAT arrive in lumps
The VAT your customers pay is not yours, but it sits in the same bank account until the quarterly return. Provisional tax, and for the self-employed social security, fall due in April, August and December. Without setting the money aside as it comes in, each payment feels like a new bill.
Growth eats cash
Every new job needs materials, labour and time before it is paid for. The faster you grow on long payment terms, the more cash the business needs just to stand still.
Seasons
Many Maltese businesses, especially in tourism and hospitality, earn most of their cash in a few months and spend it evenly through the year. Without a forecast, the winter is a surprise every year.
A profitable quarter that lost cash
A fictional Maltese contractor has a good quarter on paper. This is where the cash went.
| Line | Workings | Result | Type |
|---|---|---|---|
| Profit for the quarter | sales €180,000 − costs €165,000 | €15,000 | Calculated |
| Customers owe more at the end of the quarter than at the start | debtors up from €90,000 to €120,000 | −€30,000 | Actual |
| Materials bought for a large job not yet invoiced | −€10,000 | Actual | |
| VAT paid exceeded VAT collected | a large return from a busy previous quarter | −€5,000 | Actual |
| Provisional tax instalment | −€6,000 | Actual | |
| Change in the bank balance | 15,000 − 30,000 − 10,000 − 5,000 − 6,000 | −€36,000 | Calculated |
A profitable quarter, and €36,000 less in the bank. None of it is a loss. Every line is timing, and every line could have been seen coming in a thirteen-week cash forecast.
Two-minute self-check
Tick the statements that are true for your business today.
How do you fix cash flow problems in a small business?
In Numbers-First Management, these are the parts of the framework that do most of the work on this pain. Each one is explained in Part 2.
Weekly Dials
Cash in the bank and a rolling thirteen-week cash forecast sit on the Dials every week, with one owner who explains any change.
Read the Weekly Dials chapter →Money Engine
Shows where cash gets tied up: the margin on each job, the payment terms, the stock and how long each stage takes.
Read the Money Engine chapter →Year Map
The yearly plan ends in cash, not profit: what the bank balance should be at each quarter end after VAT, tax and loan repayments.
Read the Year Map chapter →The biggest single line in that example was customers paying late. For many Maltese businesses it is the biggest cash problem of all.
Chapter 7: Debtors that keep growing →Is this costing your business?
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