The Adviser Guide to Cashflow

Why profit and cash diverge

A client can post a healthy profit and still run out of money, and the gap usually surprises them. Profit is an accrual figure — it books a sale the day an invoice is raised, regardless of whether a cent has landed. Cash is the balance actually available to pay wages, suppliers and the ATO this week.

The wedge between the two is mostly timing. Stock bought now is paid for now but sold in three months; an invoice issued today might be settled in sixty days, or ninety, or not at all. As an adviser, the most useful early move is to separate these two stories for the client: the profit-and-loss tells them whether the business model works, while the cash position tells them whether it survives long enough to find out.

The three flows that move cash

Every dollar moving through a client's bank account belongs to one of three flows:

• Operating — cash from selling goods and services, less the cash cost of producing and delivering them;
• Investing — cash spent on or raised from equipment, vehicles and other long-lived assets;
• Financing — drawdowns and repayments of loans, plus owner contributions and drawings.

For most owner-managed businesses, the operating flow is where cashflow is won or lost, and receivables are the largest lever inside it. A growing operating outflow despite rising sales is the classic signature of a debtor book that is ageing faster than it is being collected.

Where receivables sit in the cycle

Trade receivables are sales the client has earned but not yet banked — effectively an interest-free loan extended to their customers. The longer that loan stays out, the more of the client's own working capital is tied up funding someone else's business.

This is the point most advisers can add the most value. You can model the cash impact of a client's payment terms quickly using the Merion calculator suite, then translate the number into a conversation the owner cares about: every extra week of debtor days is cash they could have spent on stock, staff or paying down debt.

Framing cashflow risk for owners

Owners rarely respond to ratios; they respond to consequences. Reframe a deteriorating cash position as a runway: at the current rate of collection and spend, how many weeks until the account is empty? That single number focuses attention faster than any aged report.

Where overdue accounts are the cause, advisers do not have to become collectors. A clean escalation path — internal reminders, then a professional recovery partner — keeps the client relationship intact. You can see how that referral works at refer a debt. This is general professional information, not advice tailored to a particular client.