Why profit does not equal cash
The project made £10k profit. So why is there only £4k in the bank?
You forecast that the next project will take a month and make £10k of profit. But when you check the bank at the end of the month, you see a different number. Why does that happen?
Start with what profit is. Simply put, it's what's left when you deduct your costs from your revenue. Take a typical agency project:
| The project | |
|---|---|
| Fee | £30k |
| Freelancers | (£14k) |
| Staff and overheads | (£6k) |
| Profit | £10k |
So why isn't £10k sitting in the bank at the end of the month? The answer is timing. The work takes one month, but the money moves over two:
| Cash | Month 1 | Month 2 |
|---|---|---|
| Client invoices | £15k | £15k |
| Freelancers | (£5k) | (£9k) |
| Staff and overheads | (£6k) | — |
| Cash in the bank | £4k | £6k |
The project was billed in two invoices: 50% at the start and 50% on completion. So £15k arrives in month one and £15k in month two, not £30k up front.
One freelancer is organised and invoices £5k in month one, which you pay. The other doesn't invoice until the project has finished, so another £9k goes out in month two. Meanwhile staff and overheads are paid as normal in month one.
The result: when the project finishes, you've made £10k profit but only have £4k in the bank. The other £6k doesn't land until the following month. Multiply that across several overlapping projects and it's easy to see how a profitable agency can still feel short of cash.
If managing cash flow brings you out in a cold sweat, talk to us. We'll take it off your plate so you can get back to the work.