Profitable on paper but short of cash
Why a consultancy can show a profit in its management accounts and still run short of cash, and which figures in Achekam show where the money is.
By Achekam · · 4 min read · For Consulting businesses in South Africa, Nigeria, Kenya
The monthly pack says the consultancy made a healthy profit. The bank balance says salaries on Friday will be tight. The partners look at each other and wonder which one is wrong.
Usually neither is. Profit and cash measure different things, and in a professional services firm the gap between them can be wide, especially when clients are large organisations with long payment cycles. The useful question is not "where did the profit go?" but "where is the cash?" This article shows where to look in Achekam, and how to turn that into a weekly habit.
Profit counts invoices; cash counts receipts
In Achekam, issuing a customer invoice takes the next number in your sequence and posts it to the ledger as debtors, sales and output VAT. The sale is in your income from that moment, whether or not the client ever pays. Management accounts then show an income statement for the period you choose, added up from those journals.
So a month in which you invoiced a great deal but were paid little shows a fine profit and a thin bank balance. Default invoice terms are thirty days, and many corporate and government clients pay well beyond their terms.
Invoices are not the only gap. Other common reasons a profitable consultancy is short of cash:
- VAT collected on invoices, which belongs to the tax authority and must be paid over;
- loan repayments, which reduce cash but are not expenses;
- owners' drawings or dividends;
- equipment or software bought outright, whose cost reaches profit only gradually;
- costs paid in advance, such as annual insurance or rent deposits.
The age analysis: who owes you and for how long
The first place to look is the money clients owe you. Receivables in Achekam are aged into 0-30, 31-60, 61-90, 91-120 and over 120 days, with overdue totals. Part payments are recorded against the invoice, so an invoice that has been partly paid shows only its remaining balance.
Read the age analysis from the right-hand side. Anything over sixty days needs a named person and a next step. A single large client sitting at ninety days can explain most of a cash squeeze on its own.
Bills recorded but not yet paid
Next, look at what you owe. Supplier bills are recorded line by line with VAT, and each can be paid in full or in parts from a chosen bank account. A bill you have recorded is already a cost in your profit, but the cash has not yet gone. The list of unpaid bills is therefore a preview of cash about to leave: the subcontracted associate's fee, the conference venue, the software renewal.
Put the bills due in the next fortnight next to the clients likely to pay in the same fortnight. That simple comparison is often more useful than any report.
No cash flow statement in the books yet
Achekam's books do not produce a cash flow statement. Management accounts give you an income statement and a balance sheet, exportable as PDF or CSV, and the movement in cash has to be worked out from them or tracked separately.
That makes understanding working capital worth an hour of a partner's time. The ACCA's article on working capital management explains working capital, the cash operating cycle and the ratios used to manage receivables and payables. For a consultancy, the cycle is mostly the time between doing the work, invoicing it and being paid.
Credit control reminders and statements
Achekam helps with the receivables side. Credit control is switched on for new workspaces and, once a day, e-mails overdue reminders and a monthly statement to customers with a balance. It never charges anyone, and it records whether each e-mail went out. By default reminders go at 7, 14 and 30 days overdue, with the invoice PDF attached, if the workspace's e-mail settings are working.
Check that the e-mails are actually going out, and that they reach the right person: in large organisations that is often a central accounts payable mailbox, not the project sponsor. The server can also produce a customer statement of account as a PDF on request, and the screen says whether it was sent. A statement attached to a partner's personal e-mail to the sponsor often moves faster than any automated reminder.
Turning the findings into a weekly cash routine
Every Monday, someone, ideally one of the partners, spends half an hour on cash:
- Bank balance this morning, from the bank.
- Age analysis: who is overdue, and who will be chased this week, by whom.
- Bills due this week and next.
- Payroll, VAT and other fixed dates coming up.
- Drawings or dividends planned, and whether they should wait.
- Invoices still to raise: work done that has not been invoiced is cash you have not even asked for.
Write the answers on one page and keep each week's page. After a couple of months, the pattern of the firm's cash will be plain.
Where to go next
Profit itself can mislead in both directions if invoicing is lumpy; work done but not yet invoiced at month end explains how to smooth it. The partners' monthly pack, described in a monthly management pack for partners, is the place to show the cash routine's findings beside the profit. And if the squeeze is serious enough to need an overdraft, the figures a bank asks for are much the same for a consultancy as for a contractor, as figures to give the bank sets out. Start with this Monday's half hour.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
