Cash flow problems can come from payment timing even while the accounts show a profit. Compare when you pay costs with when customers actually pay invoices, then locate the cash tied up. The growing company below makes €53,000 of profit across four months while its bank balance falls by €32,000.
Four months of growing and running dry
A profitable company can run out of cash when it pays its costs two months before customers pay their invoices. The example is an eleven-person B2B company selling software with paid onboarding to mid-sized customers. It invoices monthly on 60-day terms. Sales are growing, and to deliver them it has been adding people, so costs grow too.
| Month | Invoiced | Collected | Costs paid | Profit on paper | Cash at month end |
|---|---|---|---|---|---|
| Start | €60,000 | ||||
| 1 | €60,000 | €50,000 | €55,000 | €5,000 | €55,000 |
| 2 | €70,000 | €55,000 | €60,000 | €10,000 | €50,000 |
| 3 | €80,000 | €60,000 | €64,000 | €16,000 | €46,000 |
| 4 | €90,000 | €50,000 | €68,000 | €22,000 | €28,000 |
Over four months the company made €53,000 of profit and lost €32,000 of cash. Each month it collected what it had invoiced two months earlier, while paying this month's costs. In month 4 a customer with a €20,000 invoice paid late, and collections dropped.
At the end of month 4 there is €28,000 in the bank against €68,000 of monthly costs. That covers about 12 days. For comparison, the JPMorgan Chase Institute's study of 597,000 US small businesses found the median one held enough cash for 27 days of outflows (the data is from 2015). This company, growing and profitable, has less than half that.
How do you find the cause of a cash flow problem?
To find the cause of a cash flow problem, ask four questions: is profit positive while cash falls, where is the money, is growth making it worse, and what is about to leave that is not in the monthly costs. The first tells you whether you have a timing problem or a burn problem. The other three show how large the gap is and when it hits.
Is profit positive while cash falls?
If yes, as here, the problem is timing, and why profit and cash drift apart explains the mechanism. If profit is negative too, you have a burn problem, and the tools are different: work out your net burn and your run-out date first.
Where is the money?
Add up what customers owe you. Here it is €190,000: months 3 and 4 invoices (€170,000) plus the late €20,000. The company is not short of money. Almost seven times its bank balance is sitting in customers' accounts.
Is growth making it worse?
On 60-day terms, unpaid invoices settle at about two months of sales. At €60,000 a month that is €120,000. At €90,000 it is €180,000. The extra €60,000 has to come from somewhere, and it came out of the bank balance. Every further €10,000 a month of sales will tie up another €20,000 until the terms change.
What is about to leave that is not in the monthly costs?
Quarterly VAT or sales tax, annual renewals and bonuses land in specific months. Put them on the calendar before deciding how much room you have. VAT you have invoiced but not yet paid over is sitting in your account and belongs to the tax office.
How do you fix a cash flow problem?
Fix a cash flow problem in the order that releases cash fastest: collect what is already late, bill earlier, shorten terms on new contracts and renewals, price the cash cost of a big deal before signing it, and keep a buffer sized to the gap.
Collect what is already late
The €20,000 invoice is the fastest money available. Ask for it this week, directly, with a date. In the EU, Directive 2011/7/EU sets statutory interest on late business payments at the central bank reference rate plus at least eight percentage points, plus a fixed €40 for recovery costs. In the UK the statutory rate is 8% plus the Bank of England base rate, unless your contract sets a different one. The late payment interest calculator turns that into a figure you can put on the reminder. Getting paid on time covers the rest of the collection routine.
Bill earlier
Invoice subscriptions at the start of the period they cover, and invoice onboarding with a deposit before work starts. Offer a discount for paying a year upfront if you can afford it. Earlier billing moves cash forward; an annual discount also reduces the price, so include that trade-off in the calculation. An agency on retainers can bill the month ahead instead of in arrears.
Shorten terms on new contracts and renewals
Moving from 60 to 30 days cuts unpaid invoices from about two months of sales to about one. At €90,000 a month that releases roughly €90,000 once existing customers have moved over, which takes as long as your contract cycle. Start with new customers and every renewal. The EU directive caps contractual business payment terms at 60 days unless a longer period is expressly agreed and not grossly unfair to the supplier, so 60 days is the ceiling, and nothing stops you asking for less. Net 30 payment terms explains how the terms work in practice.
Price the cash cost of a big deal before signing it
A new €30,000-a-month customer on 90-day terms means three months of delivery costs paid before the first euro arrives. That can be a good deal and still sink you. Before signing, run the months until their first payment through your cash calendar. If the balance goes below a month of costs, negotiate the terms or a deposit, or line up a credit facility first. Invoice financing and overdrafts can bridge the gap, at a price, but the terms that created the gap are still there afterwards.
Keep a buffer sized to the gap
Once the fixes above are working, keep enough in the bank to cover the slowest realistic month of collections. The cash reserve calculator helps set the figure, and how cash forecasting tools compare for a startup covers the forecasting side.
What mistakes make a cash flow problem worse?
Three mistakes make a cash flow problem worse: treating it as a sales problem, trusting the profit and loss report over the bank balance, and letting one customer carry too much. The first two are shown with the month 4 numbers below.
Treating it as a sales problem. The instinct in month 4 is to sell harder. More sales on the same terms ties up more cash, which makes the next two months worse before they get better.
Looking at the profit and loss report. It says the company made €22,000 in month 4. The bank says it lost €18,000. For decisions about payroll and hiring, the bank is right.
Letting one customer carry too much. If the late payer is also your biggest customer, one delay can empty the account. When one customer is too big covers how much concentration is too much.
Where Plainhub fits
Plainhub is not invoicing or accounting software and it will not chase anyone for you. It keeps a list of your customers with what each pays and when you expect the payment, lets you mark a customer as at risk (which takes their revenue out of your runway straight away), and warns you when one customer is at 30% or more of MRR.
Your cash, burn and runway stay current as you record money in and out, which is how you spot the timing gap before payroll day. To see a squeeze like this one coming, the free cash flow forecast tool projects money in and out month by month.