This article is for owners and directors of businesses between $2 million and $10 million who keep seeing a profit at the bottom of the page and keep feeling tight at the bank. You will get a practical way to test your own cashflow viability, and an honest look at why trouble can start in the reporting even when the trading is sound.
In a good number of the cases we are called into, the trading is fine and the business cannot see what is coming early enough to act while the cheaper options are still available. By the time a cash problem is obvious in a bank balance, the affordable options have already gone.
Profitable and unviable at the same time
Profit and cash answer different questions. Profit asks whether the work you did was worth more than it cost. Cashflow viability asks whether the business can meet its obligations as they fall due, on the timing they actually fall due, with the money it will actually have. A profitable business can still fail the cash test.
Construction shows this most clearly, which is why it comes up so often in our construction work. Materials and labour go out the door in week one, the claim goes in at the end of the month, it gets certified some time after that and payment lands thirty or more days later, minus retention you will not see for a year. Every stage of that is normal, but together they create a cash gap. The profit is real, the cash arrives four months after the cost and if the next job starts before the last one pays then the gap compounds.
The same shape shows up in agencies carrying work in progress, in manufacturers holding stock and in any business growing quickly, because growth consumes cash before it produces it. A business that wins a big new contract has taken on a funding problem alongside the revenue opportunity, and the profit and loss will not tell you which of the two is bigger.
Where the reporting fails
A common problem is a profit and loss doing a job it was never built for. It is an accrual document that records revenue when earned and costs when incurred, so it does not show when money moves. Reading it as a proxy for cash is a category error, and it is the one we come across most.
Cash flow forecasts also lose their value when nobody compares them with what actually happened. If a forecast is never reconciled to actuals, it will drift further from reality every month until people stop opening it.
Timing detail is another common gap. Your debtor days are an average, and averages hide the client who takes ninety days. Your quarterly BAS, your PAYG instalment, super now moving to every payday, insurance renewals and the annual leave that everybody takes in January are all knowable and dated, yet they are commonly absent from the picture until the week they land.
In businesses of this size, the cash number often has no clear owner. The bookkeeper may own the ledger and the accountant the return, while nobody has clear responsibility for the forecast. When nobody owns the number, it tends to be produced late and acted on even later.
The fix is a report that answers the question you are actually asking, with somebody accountable for the answer.
Testing your own cashflow viability
Take your best guess at the lowest cash balance the business will hit in the next thirteen weeks and the week it happens, and write that down before you ask whoever owns your numbers to produce the same figure from the system.
If the numbers agree, you can stop worrying about the reporting and start managing the number. If they disagree, your assumptions and your system are working from different information. If nobody can produce the figure at all, you know exactly what needs to be built first.
Thirteen weeks is the right horizon because it is long enough to see a quarter’s tax obligations and a full billing cycle, and short enough that the assumptions in it are ones you can actually defend. Beyond about six months, treat the exercise as planning and keep it separate from the short-term cash forecast.
The mechanics of building one are straightforward, and the government’s guide to managing cash flow covers the basics well enough that no business needs to start from a blank page. The hard part is updating it weekly with realistic collection dates based on when customers actually pay, then making somebody accountable for the variance when the forecast turns out to be wrong.
Solvency is a director’s ongoing duty
Directors have an obligation to prevent a company trading while insolvent, and insolvency is defined by the ability to pay debts as and when they fall due, which makes cash central to the test of solvency. ASIC’s guidance on insolvency for directors is worth reading early.
The practical consequence is that a director who cannot see the cash position cannot properly discharge the duty, so reporting that is late, incomplete or accrual-only becomes a governance issue. That framing tends to change how quickly the reporting gets fixed.
What to do when the forecast shows a gap
When a business finds a gap in the forecast, timing is usually the cheapest place to start.
Progress claims can be submitted weekly where the contract allows it, new work can carry a deposit and payment terms can reflect when you actually incur the cost. Retention can also be negotiated down at the contract stage. Each of these changes improves the timing of cash while leaving the underlying value of the work unchanged.
A funding facility can make sense when the gap is structural and the business is genuinely profitable. An overdraft or invoice facility is generally easier to arrange when the business has time and a clear forecast to support the application. A maintained thirteen-week forecast gives the bank a clearer picture of the business and the funding need.
Trading decisions may also need attention, including price, mix and volume. These changes are slower and more disruptive, yet they are often where owners instinctively go first, usually by discounting to bring cash forward. Discounting to solve a timing problem converts a temporary gap into a permanent margin reduction, which is a poor trade in all but a few situations.
The reporting to have in place
A business with real cashflow viability keeps a rolling thirteen-week forecast that gets updated weekly and compared to actuals. The forecast should show significant debtors and creditors by counterparty so the slow payer is visible, with every known dated obligation loaded in, including tax, super, insurance and leave. One named person owns the number, which is the part we most often find missing.
Getting there is usually a few weeks of focused work, and it is one of the first things we build in an outsourced finance team engagement because so many other useful conversations depend on it. It is also the reporting we want in place before any growth or expansion decision, since growth can quickly turn a manageable timing gap into a serious one.
If you could not produce your lowest cash balance for the next thirteen weeks, that is the reporting capability to build first. Plenty of businesses have simply never been asked to build it.
Book a call and we will look at what your current reporting is showing and what it would take to close the gap.