The phone call usually comes at the wrong moment, often on a Friday afternoon in January or July, when a tax bill lands and the bank account can't cover it. "But we're profitable," the client says. "The P&L looks fine." This happens more often than it should, and it's almost always preventable. The problem isn't the profitability. It's the timing.
Profit is not cash
This sounds obvious until you trace through exactly why a profitable company can run out of money. Profit is an accounting concept - it's revenue recognised minus expenses recognised. Cash is what's actually in the bank. The gap between them is created by four main mechanisms:
- Timing of customer payments: Revenue is recognised when an invoice is raised, but cash arrives when the customer actually pays. A business invoicing £50,000 in December with 60-day payment terms won't see that cash until February.
- Tax bills: Corporation Tax accumulates throughout the year as profit is earned, but the payment date is fixed at 9 months and 1 day after the accounting year end. The liability builds invisibly on the P&L while cash appears available.
- Stock and WIP: A business that buys inventory or incurs costs before it invoices has spent cash before recognising revenue. The P&L smooths this; the bank account doesn't.
- Capital expenditure: Buying equipment reduces cash immediately, but the P&L only shows a depreciation charge spread over years. A £30,000 van purchase hits the bank in one go.
A business can report a £40,000 profit and still be unable to pay a £12,000 tax bill, if that profit was earned on credit terms and the cash hasn't arrived yet.
The tax timing problem
For limited companies, Corporation Tax is the most dangerous cash trap because it's invisible until the payment date. A company with a March year end owes CT by 1 January the following year, nearly ten months later. Meanwhile, the director sees profit in the accounts, takes dividends, and doesn't realise a large tax payment is accumulating.
Here's what that looks like for a company with a March year end and £80,000 profit:
VAT compounds the problem. If the company is VAT-registered on the standard scheme, it has collected VAT from customers and holds it in the bank, but it belongs to HMRC, not the business. A cash balance of £30,000 that includes £8,000 of collected VAT is actually a cash balance of £22,000 plus a liability.
⚠️ The most common trigger: A director takes a large dividend in December based on the P&L looking good, without accounting for the CT payment due in January and the VAT return due in the same month. The combined outflow exceeds what was left after the dividend.
A worked example of the gap
Consider a consulting company with a June year end. Annual revenue: £180,000 on 30-day terms. Monthly costs: £8,000. Profit: approximately £84,000 per year, pre-tax.
| P&L profit for quarter (£21,000) | +£21,000 |
| Invoiced in August, not yet paid | −£15,000 |
| CT provision (building toward March payment) | −£4,200 |
| VAT collected, held for HMRC | −£5,400 |
| Actual free cash generated this quarter | −£3,600 |
The P&L shows a profitable quarter. The actual free cash position is negative. If the director draws a dividend based on the P&L, there's an immediate problem.
The three ratios to watch
Three numbers give early warning of a cash squeeze. None of them require complex modelling, just consistency in tracking them:
1. Debtor days
How long it takes customers to pay. Formula: (trade debtors ÷ annual revenue) × 365. A business with 30-day terms but 55-day actual debtor days has a structural cash lag. Every pound of revenue is sitting in a debtor balance for nearly two months before converting to cash.
2. Cash runway
How many months of operating costs the current cash balance covers, after setting aside provisions for upcoming tax payments. A business with £45,000 cash, £10,000 CT due in three months, and £6,000 monthly costs has a true runway of about five months, not seven.
3. VAT-adjusted cash
The bank balance minus all collected VAT not yet remitted. This is the cash that actually belongs to the business. Many directors don't separate this out, which inflates their perceived cash position by 20% of their VAT-inclusive turnover each quarter.
✓ Simple rule of thumb: Before taking any dividend, check: (1) Are all current debtors collectible within 30 days? (2) Is there cash set aside for the next CT and VAT payment? (3) Does the remaining balance cover at least three months of costs? If all three are yes, the dividend is safe to take.
How to see the crisis coming
The businesses that avoid cash crises are not necessarily more profitable. They have better visibility of what's coming. Three practices make the biggest difference:
- Separate the tax provision from operating cash. Some directors keep CT and VAT funds in a separate savings account, moved there monthly as they accrue. This makes the provision visible and prevents it from being spent.
- Track the tax liability forward, not backward. Most accounting software shows what was owed. What's useful is knowing what will be owed: current year CT as it builds, the VAT quarter in progress, any PAYE accruing.
- Build debtor chasing into the routine. A 10-day reduction in average debtor days on £180,000 annual revenue releases approximately £4,900 in cash, without any change to trading activity. For most small businesses, debtor management is the highest-return cash improvement available.
💡 Rooby tip: Rooby shows your clients' upcoming tax liabilities - Corporation Tax, VAT, and Self Assessment - calculated in real time from their Xero data, so you and your client can see what's building before it becomes a problem.
The conversation that prevents the crisis
Most cash crises in profitable businesses come down to one missed conversation: nobody told the director that the profit on the P&L isn't the same as cash available to draw. Once that's clear, and once they can see the upcoming tax liabilities with actual numbers attached to them, the decision-making changes.
That conversation is easiest to have with current numbers. A forecast built from last year's accounts is useful context; a live view of the CT accruing right now, the VAT quarter in progress, and the cash currently sitting in the business is what makes the advice actionable.
Rooby syncs with Xero to show upcoming CT, VAT, and Self Assessment liabilities in real time, so cash planning starts from accurate numbers.