Finance · Proving to Scaling
Profit isn't cash yet
You see where your profit goes between the P&L and the bank, you work out what a payment term costs you, and you know in advance how much cash growth will take.
Worth reading first: Reading your P&L
Does this sound familiar?
- We had our best year ever, and in December I had to extend the overdraft to pay salaries.
- At the end of March the balance looked healthy. By mid-April half of it had gone, and I didn't know where.
- A big client wants sixty-day payment terms. It's a good name to have, so we said yes.
- The accountant says we made €110,000 profit. There's less in the bank than last year.
- We're hiring four people for a project that starts in two months. Only after that does the first invoice go out.
Who it's for, and when
For founders and members of the leadership team at a company that makes a profit and is still short of cash, or that wants to grow and doesn't know how much cash that takes. It starts in Proving, when the first big clients come in with long payment terms. In Organising and Growing it gets sharper: you hire people before the revenue is there, and every extra euro of revenue ties up cash first. If you're in Scaling, you fund that growth on purpose, with a buffer and a bank that knows the plan.
The model
Your P&L counts what you earned at the moment you did the work. Your bank counts cash at the moment it comes in or goes out. Between the two there's time: your client pays in 45 days, your people get paid at the end of the month, the VAT goes out every quarter. And some cash goes out that isn't on your P&L at all: an investment paid in one go, a repayment on your loan.
The cash tied up in your business between doing the work and getting paid is called working capital: debtors, work in progress and stock, minus what you still owe your suppliers. When your revenue grows, it grows with it. At 45-day payment terms, every extra €100 of annual revenue ties up about €15 in debtors, including the VAT you've already paid over. That's why a growing company runs short of cash even when it makes a profit: the profit comes in later than the cost of growing goes out.
The bridge from profit to cash has fixed steps. You start with net profit, add back depreciation (it cost no cash this year), take off the change in working capital, and then investments and loan repayments. What's left is the change in cash: what went up or down in the bank this year. Accountants call this the cash flow statement.
Alan Miltz, Cash Flow Story and the Power of One, set out in the section on cash in Scaling Up by Verne Harnish (2014). The cash conversion cycle comes from Verlyn Richards and Eugene Laughlin (Financial Management, 1980).
Debtors and debtor days
What clients still owe you. In days: debtors divided by revenue including VAT, times 365. The question: how many days is it, and who's well past your payment terms?
Work in progress and stock
Work you've done but haven't invoiced yet, and goods you've bought but haven't sold yet. In a services business there's often more cash here than you'd think: a three-month project you invoice on delivery is three months you fund yourself. The question: can you invoice in instalments, or in advance?
Creditors and creditor days
What you still owe. This works the other way: the later you pay, the longer the cash stays with you. Don't stretch it past what you've agreed. A supplier who gets paid late will build it into their price later.
VAT and payroll tax
VAT isn't yours: you collect it for the Dutch tax authority (Belastingdienst). On the invoice basis (factuurstelsel) you pay VAT on what you've invoiced, even if the client hasn't paid yet. Payroll tax is due the month after the salary, and holiday pay goes out in May. The question: do you know which months these amounts go out?
Investments
Laptops, a refit, a company car. On the P&L a share shows up each year as depreciation; in the bank it goes in one go. The question: when do you pay, and will you have the cash then, or will you finance it?
Loan repayments and corporation tax
Only the interest on a loan is on your P&L. You pay the repayment out of your profit after tax. And corporation tax is paid through provisional assessments, often in monthly instalments. The question: is your net profit plus depreciation bigger than your repayments?
Pitfalls
Reading today's balance as what you've got
At the end of March the VAT for the first quarter is still in your account, and at the end of April it isn't. A balance only means something once you set it against what still has to go out in the coming weeks: VAT, payroll tax, salaries and interest. Look at the lowest balance over the coming months.
Giving away payment terms to win the deal
Thirty extra days doesn't change your profit. But the cash stays with the client thirty days longer, for as long as they're a client. Work it out before you say yes, and ask for something in return: a higher price, or an invoice up front.
Watch and read
The difference between profit and cash flow in two minutes, and why a profitable company can still run out of cash.
Watch on YouTubeWhat working capital is, with an example of a company that needs a lot of it and one that needs very little, and how it ties in with cash.
Watch on YouTubeThe Dutch Chamber of Commerce (KVK) explains the difference between an operating budget (your profit) and a cash flow budget (your cash). In Boldcaster they're called Budget & forecast and Cash. In Dutch.
Watch on YouTubeTo go further
Alan Miltz on the seven levers that improve profit and cash, including debtor days and creditor days. The idea behind Levers in Boldcaster.
Watch on YouTubeRead
Scaling up: de groeiformule
Verne Harnish · 2016 · ISBN 9789047008682
The last part is about cash, with Alan Miltz's Power of One and the questions to ask to get paid sooner and tie up less cash. This is the Dutch edition; the English original is Scaling Up (2014, ISBN 9780986019593).
View the bookApply it
- 1
1. Work out your days
Debtor days: debtors on your balance sheet divided by your twelve-month revenue including VAT, times 365. Creditor days: creditors divided by your purchases including VAT, times 365. Do the same for work in progress, against your revenue excluding VAT. Put the results next to your payment terms.
- 2
2. Build last year's bridge
Net profit, plus depreciation, minus the change in working capital, minus investments, minus loan repayments. Does the result match what went up or down in the bank? If it's well off, ask your bookkeeper what else went out: a dividend, a private withdrawal, a late tax assessment.
- 3
3. Look twelve months ahead
Enter your payment terms, investments and loan repayments in Budget & forecast. The Cash tab shows what comes in and goes out each month, including the VAT return and payroll tax. Look at the lowest balance, and whether it stays above two months of costs.
- 4
4. Pick one lever
Invoice work in progress monthly or partly in advance, send invoices on the day of delivery, call the day after the due date, and put your payment terms in your terms and conditions and your quotes. In Levers you can see, per lever, how much cash getting paid a day sooner brings in.
Examples
What clients paying 15 days later costs you, on €3 million revenue
Annual revenue excluding VAT: €3,000,000 Revenue per day: €3,000,000 / 365 = €8,219.18 Including 21% VAT: €9,945.21 per day 15 days more: 15 x €9,945.21 = €149,178.08 If your clients go from 30 to 45 days, you have almost €150,000 less in your account. It happens once, but as long as they pay like that it doesn't come back. Your net profit doesn't change. At 5% interest on your overdraft it also costs about €7,500 a year.
The bridge from profit to the bank, financial year 2026
The agency from the lesson Reading your P&L: 25 people, €3 million revenue. Net profit: €113,400 Depreciation: €40,000 Increase in debtors (revenue from €2.6 to €3.0 million, 45 days): -€60,000 Increase in work in progress: -€25,000 Increase in creditors: €12,000 Investments (laptops and refit): -€60,000 Loan repayment: -€48,000 Change in cash: -€27,600 The agency made €113,400 profit and ended the year with €27,600 less in the bank. Nothing went wrong: it grew, it invested and it paid down its loan.
What the next round of growth takes
Next year the agency wants to reach €3.6 million. At 45 days that means €537,000 outstanding in debtors, against €447,500 now: €89,500 more tied up. It hires four people, three months before their work can be invoiced: 4 x €6,500 x 3 = €78,000 in wages with no revenue against it. Together that's €167,500, needed before the extra profit comes in. A buffer of two months of costs is about €470,000 for this agency. Work that out in advance and you can talk to the bank before things get tight.
Do this in your own business
Everything up to here is free. What you fill in for your own business, you keep in Boldcaster.
- Go to Budget & forecast. The Cash tab shows your balance per month, twelve months ahead, with your payment terms, the VAT return, payroll tax, investments and loan repayments. If the balance drops below your buffer of two months of costs, you see which month. In Levers you see what collecting sooner or paying later does to your profit and your cash.
- You assign the lesson to your team and see who has done it.
- The quiz counts towards your progress, and you see which lesson comes next.
Four weeks free. You'll land straight in this lesson.
Quiz
6 situations. You need 5 of 6 right. You can try again at any time.
1.Your revenue grew by 20% and your profit went up. Yet there's less in the bank than last year. What's the most likely cause?
2.Your twelve-month revenue is €3 million excluding VAT. Your balance sheet shows €450,000 in debtors. How many debtor days is that?
3.A client with €600,000 annual revenue excluding VAT wants 60-day payment terms instead of 30. How much cash is tied up for longer as a result?
4.It's the end of March and there's a high balance in the bank. You want to give the team a bonus. What do you do first?
5.You repay €4,000 a month on a loan and pay €800 a month in interest. What's on your P&L?
6.You run three-month projects and invoice on delivery. What helps most to tie up less cash?
Nothing is saved here. In the app, the quiz counts towards your progress.
Read next
- What your people bring in · You work out how much gross profit every euro of wages brings in, compare it with the benchmark for your sector, and know how much payroll your current gross profit can carry.
- The levers · You know the seven levers for profit and cash, you know what 1 per cent or one day is worth in your business, and you pick the lever you'll pull this quarter.
Not sure where to start? Take the growth scan