Growth made a profit that year. The auditors signed it off. The cash never moved. Chris read Tom's report first thing on Monday, and something in it didn't sit right. The numbers were all there. They just didn't seem to agree with each other. He replied with one line. "Tom — thanks for this. Good to see we're profitable. So where did the cash go?" Tom had been expecting the question. He'd spent the weekend with the year-end accounts, and every figure reconciled. The statements were signed. Nothing was wrong. And he still couldn't answer it. EBITDA of £2 million. Net profit of £1 million. Cash generated from operations: negative £1 million.
He called Maya. "I need one more thing. A cash report — source of funds and use of funds, full year. Where every pound came from and where it went." "By tomorrow morning?" "By tomorrow morning." "You'll have it." Maya spent the afternoon in the cash data. Her report landed in Tom's inbox that evening. Hi Tom, Here's the full year. Sources on the left, uses on the right.
One thing you should know before you read it: we delayed £1 million of supplier payments this year. That's in there, propping up the closing balance. I think we need to understand the operating cash loss properly. Either we have cash stuck in debtors and work in progress, or our costs are out of proportion to what we're actually collecting. My instinct is both. Maya Tom read it twice. The first thing he saw was the shape of the year. Growth opened with £2 million in the bank. It closed with £2 million in the bank. Net cash movement: zero. And it had reported £1 million of profit. The second thing he saw was worse. He worked the gap himself, line by line, until it tied.
Four lines. That was the whole distance between a £2 million profit figure and a £1 million operating cash loss. Two million pounds of revenue had been recognised and never invoiced. Another million had been invoiced and never collected. A million of costs had been incurred and simply not paid yet — which flattered the cash position rather than the profit. And a million of VAT had gone out of the door without ever appearing in EBITDA at all, because VAT never touches the profit and loss account. Growth collected it from clients, held it, and passed it to HMRC. It never counted as income. It absolutely counted as cash. Tom wrote back to Chris the next morning. Hi Chris, Good question, and a harder answer than I'd like. Four things. We billed £13 million and collected £12 million. A million is sitting in debtors. We recognised £15 million of revenue but only billed £13 million. That £2 million isn't cash and isn't close to being cash — it's work in progress on the balance sheet. Some of it should probably have been billed already, and I'd like to find out how much. We incurred £1 million of costs we haven't paid. That money is helping our closing balance today. It hasn't gone away. It's a payment we've moved, not a payment we've avoided. And we borrowed £1 million to fund operating payments. So: EBITDA of £2 million, and cash from operations of negative £1 million. The profit figure needs the same treatment. We reported £1 million of net profit. Strip out the £500,000 FX hedging gain, the £500,000 of interest income and the £500,000 gain on disposal of fixed assets, and the business made a loss of £500,000 from its own operations. Growth didn't finish the year with £2 million because it earned its way there. It finished with £2 million because it borrowed precisely enough to stand still. Which brings me to the dividend. Shareholders are entitled to expect a share of the profit, and on paper there is one. The cash doesn't support paying it. That's your call, not mine, but I'd be failing you if I let you make it without seeing this. Tom This is the reason I created SLOS. Part 5 was about where cash comes from. This one is about what happens to profit on the way to becoming cash — because that journey is where most businesses quietly fail, and almost nobody measures it. Profit is an accounting outcome. Cash conversion is a business outcome. They are not the same thing, and the gap between them has a shape you can measure: Revenue → billed → collected → operating cash → free cash flow. Something leaks at every stage. Revenue that never gets invoiced. Invoices that never get collected. Costs deferred rather than removed. Tax and VAT that move real money without ever appearing in profit. None of it is visible in EBITDA. All of it is visible in your bank account, eventually. Every business has a conversion rate between the profit it reports and the cash it generates. Most have never calculated it. The ones that have can tell you, in four lines, exactly where the money went. Growth's problem was not that it was unprofitable. On paper it wasn't. Its problem was that nobody had ever asked the profit to explain itself. If you've ever reported a profit you couldn't find in the bank — I'd like to hear about it. Comment, or send me a message. Mala Sun — Founder of Stonerose Treasury