Cash flow
Profit on paper doesn't pay the rent; cash in the bank does. Learn why the two differ, how many sales you need to break even, and how many months your cash will last.
Profit is not cash
Profit
Sales minus costs for a period, counted when the work is done. It tells you whether the business is worth running.
Cash
The money actually in your account, counted when it moves. It tells you whether you can pay rent on Friday.
Nima's catering, March
Cash at the start 2,000
Big event job, invoiced 3,000 (client pays in 60 days)
Food + staff, paid now -1,800
Cash after the job 2,000 - 1,800 = 200
Rent due end of March -600
Profit on the job 3,000 - 1,800 = 1,200
Cash at month end 200 - 600 = -400A profit of 1,200 on paper, and 400 short on rent.Nothing about the job was bad. The costs came in March; the money comes in May.
Check yourself
Why can't Nima pay his rent at the end of March?
- The event lost money once the food and staff costs were counted
- He had to pay his costs now, but won't be paid for 60 days
- His rent is too high for a catering business of his size
- He priced the event far too low for the work involved
Show the answer
He had to pay his costs now, but won't be paid for 60 days
Yes. The job made 1,200 profit. The problem is timing: 1,800 went out in March and 3,000 comes in two months later.
Ways to bring cash in sooner
- Take a deposit before you start large or custom jobs.
- Invoice the same day the work is done, and follow up politely on the due date.
- Ask suppliers for time to pay, and buy stock in smaller batches.
- Keep a buffer: some cash set aside for the gap between paying out and getting paid.
Break-even point
The number of sales in a period where profit is exactly zero: every fixed cost is covered and nothing is left over. Break-even units = fixed costs ÷ profit per unit, where profit per unit is price minus variable cost (last lesson).
Below break-even you lose money that month. Above it, each extra sale adds its full profit per unit.
Fixed costs per month 1,200
Price 50
Variable cost per unit 30
Profit per unit 50 - 30 = 20
Break-even = 1,200 / 20 = 60 units
In sales: 60 x 50 = 3,000
Check: 60 x 20 = 1,200 = fixed costs60 units a month (3,000 in sales) to break even. Unit 61 is the first to make a profit.Divide by the profit per unit, not by the price. Dividing by the price (1,200 / 50 = 24) forgets that every sale has its own costs.
Check yourself
Roya sells cupcake boxes for 25. Each box costs her 10 in ingredients and packaging. Her fixed costs are 900 a month. How many boxes must she sell each month to break even?
- 36 boxes
- 60 boxes
- 90 boxes
Show the answer
60 boxes
Right. Profit per box is 25 − 10 = 15, and 900 ÷ 15 = 60. Check: 60 × 15 = 900.
Runway
How many months your cash lasts at the current rate. First find your burn: money going out each month minus money coming in. Then runway = cash ÷ monthly burn. If more comes in than goes out, you're not burning at all.
It's a warning light, not a target. When runway drops under a few months, it's time to cut costs, raise prices or bring cash in, not to hope.
Hoda's new shop
Cash in the bank 6,000
Going out each month 1,500
Coming in each month 700
Monthly burn 1,500 - 700 = 800
Runway = 6,000 / 800 = 7.5 months
If sales stopped completely:
Runway = 6,000 / 1,500 = 4 monthsAbout 7.5 months at today's sales; 4 months in the worst case.Work out both. The worst case tells you how much time you really have to fix things if a bad season hits.
Check yourself
Arman has 9,000 in cash. His business spends 2,000 a month and reliably brings in 500 a month. At this rate, his cash lasts 4.5 months.
Show the answer
False
False. His burn is 2,000 − 500 = 1,500 a month, so runway is 9,000 ÷ 1,500 = 6 months. 4.5 months (9,000 ÷ 2,000) would only be right if his sales dropped to zero, which is worth knowing as his worst case.
A simple cash forecast
- Start with the cash you have today
Only money actually in your accounts, not money you're owed.
- List money in, by the month it will arrive
Use the date you expect to be paid, not the date you did the work.
- List money out, by the month you'll pay it
Rent, stock, wages, loan payments, fees, and anything yearly that falls in that month.
- Run the balance and find the lowest point
Look three to six months ahead. If any month goes negative, you now know when to act, while there's still time.
Check yourself
Does this mainly change WHEN money moves, or HOW MUCH you earn?
- Asking for a 50% deposit on custom orders
- Raising your price by 10%
- Sending invoices the same day instead of at month end
- Finding a cheaper supplier for the same flour
- Agreeing 30 days to pay your supplier
- Dropping a product that loses money on every sale
Show the answer
When money moves: Asking for a 50% deposit on custom orders, Sending invoices the same day instead of at month end, Agreeing 30 days to pay your supplier
How much you earn: Raising your price by 10%, Finding a cheaper supplier for the same flour, Dropping a product that loses money on every sale
Lesson recap
- Profit is counted when work is done; cash is counted when money moves. You pay bills with cash.
- Bring cash in sooner with deposits, prompt invoices and supplier terms, and keep a buffer.
- Break-even units = fixed costs ÷ (price − variable cost per unit).
- Runway = cash ÷ monthly burn. Work out the worst case too, and forecast three to six months ahead.