A business can be profitable on paper and still struggle to pay its bills. Here’s why—and what you can do about it.
One of the most frustrating situations for a business owner is watching sales increase while the bank account never seems to catch up.
You are winning new customers. Your employees are busy. Your invoices are going out. Your income statement may even show a healthy profit.
Yet when payroll, taxes, rent, suppliers and other expenses come due, you find yourself asking:
“Where did all the money go?”
The answer is often sitting in your accounts receivable.
Profit Does Not Always Equal Cash Flow
Suppose your company completes $100,000 of work for customers during the month. You invoice those customers on Net 30 or Net 60 terms.
Your accounting system may recognize that $100,000 as revenue.
But if your customers do not pay for another 30, 45 or 60 days, you do not have that $100,000 available to pay today’s expenses.
Meanwhile, your business may have immediate obligations:
- Payroll
- Payroll taxes
- Insurance
- Rent
- Equipment payments
- Materials
- Fuel
- Utilities
- Vendor invoices
- Taxes
- Marketing expenses
This creates what is commonly called a cash flow gap.
Your business has earned the money, but you are waiting for the customer to pay it.
That gap can become particularly difficult when your company is growing.
Growth Can Actually Make a Cash Flow Problem Worse
It seems counterintuitive, but rapid growth can create financial pressure.
Imagine your company was generating $250,000 per month in sales. Your customers paid within 30 days, and your expenses were manageable.
Now sales increase to $500,000 per month.
That sounds like great news—and it is.
But you may also need to hire additional employees, purchase more materials, increase inventory, expand facilities and spend more money delivering your products or services.
At the same time, your customers may still be paying you 30, 45 or 60 days after receiving your invoices.
The faster you grow, the more money can become tied up in accounts receivable.
This is why working capital is so important to growing businesses.
What Is Working Capital?
Working capital is essentially the money available to operate your business and fund day-to-day activities.
A simple way to think about it is:
Working Capital = Current Assets − Current Liabilities
Accounts receivable are generally considered a current asset.
The problem is that an invoice is not the same thing as cash in the bank.
A $50,000 invoice from a financially strong customer may be extremely valuable, but if that customer does not pay for another 45 days, you cannot use that invoice to pay this Friday’s payroll—unless you have another source of working capital.
This is where business owners need to understand their options.
Five Ways to Improve Business Cash Flow
1. Shorten Your Payment Terms
If appropriate for your industry, consider whether Net 60 or Net 90 payment terms are necessary.
Moving customers from Net 60 to Net 30 can significantly improve cash flow over time.
Of course, large customers often dictate their payment terms, and changing them may not be realistic.
That is why businesses should look at more than just the terms printed on an invoice.
2. Invoice Customers Immediately
The clock generally does not start until the invoice is properly issued.
If your employees finish a project on Monday but the invoice does not go out until Friday, you have already lost several days of potential cash flow.
Make invoicing a priority.
Automating invoicing through your accounting system can help eliminate unnecessary delays.
3. Monitor Aging Accounts Receivable
Do not wait until an invoice is 60 or 90 days old before asking what happened.
Create an accounts receivable aging report and monitor it regularly.
Pay particular attention to:
- Current invoices
- 1–30 days past due
- 31–60 days past due
- 61–90 days past due
- 90+ days past due
A growing balance in older receivables can be an early warning sign of a cash flow problem.
4. Improve Your Collections Process
Many business owners are uncomfortable asking customers for payment.
But collecting money that your company has already earned is not being aggressive—it is part of running a business.
Establish a consistent process for following up on outstanding invoices.
You may want to contact customers before an invoice becomes overdue rather than waiting until payment is late.
Also make sure your invoices are accurate and contain everything the customer requires for payment.
A missing purchase order number, incorrect billing address or incomplete documentation can delay payment.
5. Consider Accounts Receivable Financing
When customers are financially strong but pay slowly, a business may have another option: invoice factoring.
Instead of waiting weeks for an approved customer to pay an invoice, the business can access a significant portion of the invoice value much sooner.
For example, suppose your company has $100,000 in eligible outstanding invoices.
Rather than waiting 30, 45 or 60 days for customers to pay, a factoring company may advance a percentage of those invoices, subject to its underwriting and program terms.
When the customer pays, the remaining reserve—less the factoring company’s fee—is released according to the agreement.
The result is that the business can convert qualifying accounts receivable into working capital without waiting for the customer’s normal payment cycle.
Is Factoring a Loan?
This is an important question for business owners considering their financing options.
Traditional bank financing generally involves borrowing money and creating a debt obligation.
Invoice factoring is structured differently.
Factoring involves the financing or purchase of accounts receivable rather than simply providing a traditional business loan.
The specific legal and financial structure depends on the factoring agreement, but the key concept is that the transaction is tied to the company’s receivables.
For businesses that have strong customers but do not qualify easily for traditional bank financing, factoring can be an alternative source of working capital.
Who Can Benefit From Invoice Factoring?
Factoring can be particularly useful for businesses that:
- Invoice commercial customers
- Offer Net 30, Net 45 or Net 60 terms
- Are growing quickly
- Have significant payroll or operating expenses
- Need working capital before customers pay
- Have difficulty obtaining traditional bank financing
- Want to avoid giving up ownership to raise capital
Industries that commonly use accounts receivable financing include staffing, manufacturing, distribution, oilfield services, healthcare staffing and other business-to-business industries.
The important factor is not simply the industry.
The quality and creditworthiness of the company’s customers, the invoices themselves and the overall transaction structure are important considerations.
The Bigger Lesson: Watch Cash Flow, Not Just Profit
A profitable business can still fail if it runs out of cash.
That is why business owners should monitor both profitability and liquidity.
Ask yourself:
How much money am I owed today?
How quickly are my customers paying?
How much cash will I need over the next 30 days?
What happens if my largest customer takes another 15 days to pay?
Those questions can tell you more about your company’s immediate financial health than looking at your profit-and-loss statement alone.
At American Receivable, we work with businesses that need to turn outstanding invoices into working capital. Invoice factoring can provide businesses with access to cash tied up in eligible accounts receivable, helping them meet current obligations and pursue new opportunities without waiting for customers to pay.
The goal isn’t simply to get more money into your bank account.
The goal is to give your business the working capital it needs to keep moving.
The Question Most Business Owners Should Ask
The next time your business is profitable but cash feels tight, don’t automatically assume you need more sales.
Ask a different question:
“How much of my money is already sitting in accounts receivable?”
You may discover that the cash you need isn’t somewhere outside your business.
It may already have been earned—you just haven’t collected it yet.
And that can change the entire way you think about financing growth.
