"My accountant says we made money last year. So why can't I make payroll?"
I hear some version of that question more than almost any other.
The textbook answer is simple. Profit and cash are two different things. Any accountant can explain that, and they'd be right.
But after more than 25 years inside founder-led businesses, capital-intensive projects and my own companies, I've learned that the more useful question isn't where the cash went.
It's why the owner didn't see it going.
Profit and Cash Live in Different Places
Profit lives on your income statement: revenue minus expenses.
Cash lives in your bank account.
You get into trouble when a lot of money leaves the bank through transactions that never touch your profit and loss statement. They land on the balance sheet instead, where most owners rarely look.
The usual suspects:
- –Inventory you've bought but haven't sold.
- –Customers who owe you money but haven't paid.
- –Loan principal payments. Only the interest shows up as an expense.
- –Equipment and vehicles. The cash leaves today; the expense trickles in over years as depreciation.
- –Owner draws and shareholder loans.
- –Income taxes on profits you've already spent.
- –Cash payments with no paper trail.
Any one of these can be perfectly normal. Together, they can quietly drain a profitable business dry.
The profit and loss statement tells you whether your business model makes money. Your balance sheet and your bank account tell you whether you'll survive long enough to collect it.
Where I Look First
Your Best Customer May Be Your Biggest Cash Problem
In some industries, slow payment is simply "normal."
Large corporations and government agencies are a good example. You know they'll pay. That's the safety. But it might take five or six months. Some of them carry an attitude that you should feel privileged to work with them at all.
Meanwhile, you've already paid your employees, bought the materials and covered the overhead to deliver the work.
That customer isn't a credit risk. They're a cash flow risk. And there's a difference.
A perfectly profitable contract with a perfectly safe customer can still sink a small company. Without realizing it, you've become their bank.
Your Receivables Are Older Than You Think
Many owners are simply too nice when it comes to collecting.
They don't want to upset a good customer. So, invoices drift to 60 days, then 90, then 120 and beyond.
Pull your 30/60/90-day aging report. Go after everything that's owed but go hardest after the oldest amounts. If something truly can't be collected, call it what it is: a bad debt. Hand it to a collection agency or start legal action and do it quickly.
You can't keep being Mr. Nice Guy. Your business is on the line.
Being a good partner to your customers is one thing. Financing them is another.
What's Coming Due vs. What's Coming In
Your aging reports also let you see the future.
When the bills you owe in the next 30 days are larger than the money you can realistically collect in the next 30 days, you can see the squeeze coming before it arrives.
That isn't automatically a crisis. But it's an early warning. The real questions are always the same:
How much cash is coming in?
How much is going out?
When?
Money That Leaves Without a Trail
This one makes some owners uncomfortable.
Cash payments are hard to track. Plenty of owners like paying for things in cash. I understand why. But every dollar that leaves without a trail is a dollar you can't manage.
Everything should run through a corporate credit card, a bank transfer or accounts payable. Something with an audit trail.
I don't see auditability as an accounting requirement. I see it as a management tool. If you can't trace where the money went, you can't stop it from going there again.
While you're at it, look at your balance sheet accounts for odd activity or unusually large amounts. Look at employee expense accounts too. Leaks often hide in places nobody reviews.
Why Owners Don't See It Coming
The mechanics above aren't complicated. So why do smart, hard-working owners get blindsided?
In my experience, it's rarely the accounting. It's the owner's relationship with the truth about their own business.
They Run the Business by Feel
Many founders run their companies by the seat of their pants.
They do just enough financial reporting to keep the bank and the tax man happy. Beyond that, they rely on instinct. And for years, instinct works. They built the company. They know every customer, every supplier and every employee by name.
That works, until it doesn't.
The Business Outgrew the Founder's Instincts
I once worked with a multi-division family business after its founder passed away.
He had built something real. But the books had only ever been good enough for taxes. Nobody tracked revenue and costs by division. On a consolidated basis, the company looked fine.
So, we started tracking every division separately.
That's when we saw just how badly some of them were bleeding, and where the money was actually going. Profitable divisions were quietly funding the losers. The company-wide numbers had hidden it for years.
I'm a big believer in Pareto's Law, the 80/20 rule. In most businesses, a small number of divisions, products, customers or inventory items generate most of the profit. Others consume far more than their share of the cash. If you can't see the business at that level, you can't know where you're bleeding.
Here's the lesson I took from it:
The instincts that built your business may not be enough to run the business it has become.
Companies grow. Markets shift. The underlying business changes. The owner's mental picture often doesn't.
Sometimes They Don't Want to Know
This is the uncomfortable one.
Some owners don't lack visibility by accident. They avoid it. Bad news on paper makes the problem real. Not looking feels safer.
It isn't. It just means the problem keeps growing without you.
Experience Can Work Against You
I'm not writing this from a pedestal. I've made this mistake myself.
I've been through several recessions since the 1980s. In my experience, they lasted six to 18 months. So, when Alberta's downturn hit in 2015, I kept making decisions based on a belief that "it has to get better soon."
It didn't. That downturn lasted the better part of six years.
I wasn't making decisions based on the evidence in front of me. I was making them based on what my experience told me should happen next.
Experience is valuable. It becomes dangerous when what you expect to happen overrides what the numbers are telling you.
What I Do in the First Week
When an owner calls me with this problem, I don't start by looking for more money.
Pouring new money into a business that's leaking cash just fills a bucket with a hole in it.
I start by finding the holes.
How much time do we have? What's the real cash burn, and how many weeks of runway are left? That answer determines everything else.
Where is the cash actually going? I go through every leak we've talked about: inventory, receivables, loan payments, equipment, owner draws, taxes and untracked cash.
What's carrying the business, and what's dragging it down? I break the numbers out by division, product line, customer and inventory item to find the loss leaders.
What's owed to us? I pull the aging reports and start collecting immediately, oldest first.
Can we see clearly? If the accounting system can't show where the money goes, I change how data is entered so it can.
Where's the money without a trail? Cash transactions stop. Everything goes through accounts with an audit trail.
Then we stop the bleeding and increase the cash coming in. In that order.
None of this is complicated on paper. The hard part is doing it while payroll is due Friday, the bank wants answers, and you haven't told anyone at home how bad it really is.
That's usually when owners call me.
The Hardest Part Isn't the Numbers
Once the picture is clear, the owner has to accept it.
This is where a neutral third party earns their keep. I'm not emotionally attached to the division the owner started 20 years ago. I can sit down with them and show them the backup, in black and white.
Most owners get it. Some don't. Their attachment to the business they remember is stronger than the evidence in front of them.
I can't force anyone to accept reality. All I can do is put it on the table, clearly and honestly.
Don't Rebuild Yesterday's Business
If I could give a profitable-but-broke owner one piece of advice, it would be this:
Be honest with yourself about your business.
Look at the company as it actually exists today. Not how it used to be. Not how you think it is.
Then get back into your company. Close the holes. Make the changes you need to make.
And once the cash is stable, don't just rebuild the company you used to have. Ask a harder question:
If I were starting this company from scratch today, what would it look like? What would it look like three years from now?
Build that company.
The Darcy Principle
A profitable business can run out of cash. A business without visibility can run out of options before the owner understands why.
Profit is not cash, and visibility is not optional.
Don't let yesterday's experience override today's evidence.
Don't rebuild yesterday's business. Build tomorrow's.
The goal isn't just to get your bank balance back into positive territory. It's to understand the business you actually have, stop financing what no longer works, and build the business you'd choose to own three years from now.
