Profit does not tell you when money will arrive. Trace collections and payments, then explore the next three months with a simple cash-flow planner.
By A.B. Ordu · 4 min read
Photo: Karola G / Pexels
A profitable month can still leave you wondering how to cover payroll. The missing piece is often timing: your accounts show earnings, while your bank account reflects money that has actually arrived or left.
Under accrual accounting, revenue is generally recognized when earned and expenses when incurred, rather than when cash changes hands. The IRS explains this timing distinction; its tax rules have additional conditions. Here, the distinction helps explain business performance, not choose a tax method.
Accounts receivable are amounts customers owe you. Until collected, they cannot fund a payment. Even an invoice due this month may arrive next month. The SBA identifies overdue invoices as a source of cash-flow problems. More sales can therefore increase both reported profit and the amount awaiting collection.
Repaying loan principal reduces debt, rather than creating an operating expense, but it still uses cash. Interest is separate. The SBA notes that most 7(a) term loans require principal and interest payments from business cash flow.
Buying equipment also uses cash when you pay, while depreciation can spread its cost across reporting periods. The SEC explains equipment purchases, depreciation and loan repayments in its financial-statement guide. A cash plan must capture the payment, even when the profit report shows a different amount.
Hypothetical example: A business earns $30,000 of revenue in Month 1 and records $20,000 of expenses, including $2,000 of noncash depreciation. Its pre-tax profit is $10,000. It collects only $12,000 and pays $18,000 for those operating expenses, $3,000 of loan principal and $6,000 for equipment: $27,000 total.
With $10,000 available at the start, the calculation is $10,000 + $12,000 – $27,000 = -$5,000. That is an unmet cash need under these assumptions, not an actual negative bank balance. This simplified example assumes no other receipts or payments, including taxes or owner withdrawals; it is not a client story.
Start with cash available at the beginning of Month 1, excluding restricted funds and undrawn credit. For each of the next three months, enter anticipated actual cash receipts and cash payments. Use collection dates and payment dates, not sales totals or invoice dates.
Ending balance = prior balance + cash receipts – cash payments. Month 1 uses starting cash; Months 2 and 3 carry forward the previous result. This follows the cash reconciliation described in the SEC’s cash-flow explainer.
Include committed bills, payroll, principal and interest, equipment payments, owner withdrawals and anticipated tax payments from the business. Count each cash movement once: an invoice and its collection are not two receipts, and an expense and its payment are not two payments. Depreciation itself is not a cash payment.
A negative result flags a projected cash gap, not proof of insolvency. A positive month-end result can hide a shortage before customers pay. Monthly totals cannot resolve that daily timing risk, and the planner does not automatically add financing.
What could your next three month-end balances look like?
Enter seven amounts; enter 0 when there is no cash movement.
Month-end totals can hide a shortage earlier in the month. Negative results are projected cash gaps, not a finding of insolvency. Nothing is saved or sent by this planner.
Use money expected to arrive or leave, not invoices issued or sales earned. Include bills, payroll, principal and interest, equipment, owner withdrawals, and business tax payments. Count each movement once; exclude noncash depreciation and internal account transfers.
Exclude restricted funds and undrawn credit from starting cash. Negative results carry into the next month; the planner does not automatically add funding. A later positive result does not resolve an earlier gap. Educational estimates only, not individual advice.
Educational only; this article and planner are not individualized accounting, tax, legal or financial advice. Results depend on your inputs and do not guarantee cash availability.
