Solving the Cash Flow vs. Profit Puzzle
AR, AP, and the Cash Flow Conundrum
Even a profitable business can struggle to stay afloat if cash isn’t flowing correctly. Here’s why:
Accounts Receivable (AR): This represents the money owed to you by customers. Large outstanding AR means you’ve made sales but haven’t received cash yet.
Accounts Payable (AP): This is what your business owes to suppliers, vendors, or service providers. Mismanaging AP can lead to cash shortages, even if you’re turning a profit.
Cash Flow ≠ Profit
Many business owners assume that if they’re profitable, they’ll always have money in the bank. But profit is just an accounting figure—it doesn’t account for when cash actually moves in and out of your business.
For example, if you invoice a client for $10,000 but they don’t pay for 60 days, you’re “profitable” on paper, but you won’t see that cash for two months. Meanwhile, if you have bills due today, you might find yourself in a cash crunch.
How to Manage Cash Flow Like a Pro
Having a strong cash flow management strategy is crucial for stability and growth. Here are some key tactics:
1. Get Paid Faster
Send invoices promptly and clearly outline payment terms (e.g., Net 15 or Net 30).
Follow up consistently on overdue invoices—consider automated reminders.
Offer incentives for early payment and, if necessary, apply late fees.
Accept multiple payment methods to reduce barriers for customers.
2. Optimize Your Payables
Take full advantage of vendor payment terms—don’t pay bills earlier than necessary unless you get a discount.
Consider negotiating extended payment terms with suppliers to align with your incoming cash flow.
Use a business credit card strategically for short-term flexibility (but avoid high-interest debt).
3. Forecast Cash Flow
Create a cash flow projection that maps out expected inflows and outflows over the next 3-6 months.
Identify patterns in your revenue cycles and prepare for seasonal fluctuations.
Update your forecast regularly to adjust for unexpected changes.
4. Build a Cash Reserve
Set aside a portion of revenue each month to create a buffer for slow periods or emergencies.
Aim for at least 2-3 months’ worth of operating expenses in reserves.
5. Control Expenses Wisely
Regularly review expenses to identify cost-saving opportunities.
Avoid unnecessary spending during cash-tight periods.
Consider leasing equipment instead of large upfront purchases if cash flow is tight.
Common Mistakes to Avoid
❌ Assuming profit equals cash in hand
❌ Failing to track AR and AP regularly
❌ Ignoring payment terms and deadlines
❌ Not having a backup plan for slow-paying clients
❌ Relying too heavily on credit without a repayment strategy
Understanding the difference between cash flow and profit is essential to running a financially healthy business. If cash flow management feels overwhelming, Breakaway Advising is here to help—from optimizing AR and AP to building a strong cash flow strategy.
Need help getting your finances in order? Let’s talk! Email us at sales@breakawayba.com—we’d love to hear more about your business and how Breakaway can help. Or, visit breakawayba.com to learn more.
