Profit and cash are not the same
This is the misunderstanding that bankrupts profitable businesses. Profit is an accounting concept: income minus expenses in a period. Cash is physical money available in your account, today, to spend. They can go in opposite directions.
Imagine that you sell $100,000 on credit for 60 days. In your income statement, that sale is already profit. But there isn't a single peso of that in your bank account yet. If in the meantime you have to pay $40,000 in payroll and $20,000 to suppliers, your "profitable" business has nothing to do with it. That is a crisis of flow, not of utility.
That's why cash flow deserves your daily attention. It measures something different and more urgent than profits: do I have the money to meet my commitments in the coming days and weeks? A business goes bankrupt the day it cannot pay, not the day it stops being profitable.
The three types of flow that you must distinguish
Cash flow is divided into three categories, and separating them tells you a lot about the real health of your business:
- Operating flow: the money that comes in and out through your normal operations—selling, collecting, paying suppliers and salaries. It's the most important one: a healthy business generates positive cash here.
- Investment flow: money that goes out to buy assets (machinery, equipment, a premises) or that comes in when selling them. It tends to be negative when you're growing up, and that's okay.
- Financing flow: money from loans that you receive or pay, and contributions from partners. It tells you how much you depend on external debt to sustain yourself.
The most common flow traps in SMEs
Most cash crises do not come as a surprise: they were brewing and no one saw them because no one was watching the flow. These are the most frequent:
- Sell a lot on credit and collect late, while paying your suppliers in cash. The money leaves before it enters.
- Buying too much inventory: each peso in idle merchandise is a peso that you cannot use for payroll.
- Grow without planning the flow: more sales require more inventory, more staff and more upfront spending. Growth consumes cash.
- Not having a cushion: any unforeseen event (a non-paying customer, a repair) leaves you with no margin if you were operating at the limit.
How to project your flow (and why it is your best weapon)
The most powerful tool against cash crises is simple: a cash flow projection. It consists of writing down, week by week or month by month, how much money you expect to come in and how much you expect to go out. The goal is to see the "holes" before you fall into them.
With a clear projection, you can anticipate that in the third week of the month you will be short $30,000, and act in advance: accelerate a collection, negotiate a term with a supplier, or obtain a line of credit before the emergency. Without projection, you find out the day the payment bounces.
What makes it difficult to project by hand is that the information is dispersed: accounts receivable on one side, accounts payable on another, the bank on another. The projection is only useful if it is up to date, and updating it manually is tedious.
See your flow in real time with Aura
Since in Aura your sales, your orders, your invoicing and your expenses live on the same platform, cash flow practically calculates itself. The system knows what invoices you have to collect and when they are due, what you owe to suppliers, and how much actually entered the bank thanks to automatic reconciliation.
That allows you to see, on a dashboard, how much cash you have today and how much you project to have in the coming weeks, without putting together a spreadsheet each time. When the system detects that a gap is approaching, you see it in advance instead of discovering it with the payroll on top of it. For an SME, having that visibility is literally the difference between reacting on time or going out of business.
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Start your trial →Frequently asked questions
My business is profitable but I'm always short of money, why?
It is almost always a problem of collection and payment times. If you sell on credit and collect late but pay suppliers in cash, the money leaves before entering. It may also be excess inventory. Check your cash conversion cycle: how many days pass between when you pay and when you get paid.
How much cash cushion should you have?
A good rule of thumb is to have between one and three months of fixed expenses in reserve. That gives you room to survive a bad month, a client who doesn't pay, or an unforeseen event without panicking or going into urgent debt.
How often should I review my cash flow?
You can see the income statement monthly, but the flow should be reviewed weekly, and in tight businesses even daily. It is the most time-sensitive metric: a cash gap detected three weeks in advance is resolved; detected on the same day, it is a crisis.
Does selling more always improve my flow?
Not necessarily. Growing consumes cash: you need more inventory, more staff, and more upfront spending, and sometimes you sell on credit. Growth without flow planning can lead to a liquidity crisis just when the business is "going well." That's why it is projected.