Why Profit Doesn’t Mean Cash Flow – And Why That’s Killing Small Businesses in South Africa

Running a profitable business does not mean you have cash. That statement causes confusion in boardrooms and pressure in small businesses across South Africa. Statistics South Africa continues to report high failure rates among small and medium enterprises, with a significant percentage closing within the first three years. In practice, most do not fail because they are unprofitable.

They fail because they run out of cash. There is a fundamental distinction between profit and cash flow:• Profit is an accounting result.• Cash flow determines survival. A business can reflect R1 million profit on its income statement and still be unable to meet salaries, supplier commitments, or tax obligations. Understanding this difference is critical for long-term sustainability.

1. Debtors Are Not Cash

Revenue is recognised when an invoice is issued, not when it is paid. If a business invoices R500,000 in a month, that turnover increases profit immediately. However, if debtor terms extend to 60 or 90 days, the business is effectively funding its clients. This is particularly evident in agriculture, construction, and project-based industries in areas like Hoedspruit, where seasonal cycles and extended payment terms are common. You cannot pay salaries or VAT with outstanding invoices.

2. Growth Consumes Cash

Growth is often celebrated, but unmanaged growth creates liquidity pressure. When turnover increases:

• More stock must be purchased.

• More credit is extended.

• Additional staff are employed.

• Operational overhead expands.

This increases working capital requirements. If growth is not funded through retained earnings, structured debt facilities, or capital injection, cash flow tightens — even where margins remain healthy.

3. SARS Operates on Accrual, Not Emotion

Tax obligations are calculated on transactions, not on whether funds have been received. VAT is payable on invoices raised (unless registered on the payments basis).PAYE is payable monthly. Provisional tax is payable twice annually. Income tax is assessed on taxable profit. SARS does not defer payment because a debtor has not settled their account. Many businesses experience their first serious liquidity crisis when tax obligations coincide with slow collections.

4. What Healthy Cash Flow Management Looks Like

A financially structured business monitors the following monthly:

• Debtor days

• Creditor days

• Gross profit margins

• Working capital ratios

• Cash conversion cycle.

If these metrics are not reviewed consistently, management is operating without visibility. At minimum, a resilient business should maintain:

• Two to three months of operating expenses in accessible liquidity.

• Structured funding facilities aligned with growth plans.

• Accurate monthly management accounts - not annual compliance-only financials.

Conclusion

Profit is theory. Cash is reality.

If a business is generating turnover but consistently struggling to meet obligations, the issue is rarely revenue. It is structure - and structure can be corrected.

Strong financial management is not about compliance alone. It is about sustainability, risk management, and informed decision-making. Businesses that understand this distinction position themselves for long-term stability rather than short-term survival.