Why is cash flow a problem even when the company is billing well?

The income statement says one thing, the bank account says another. Many SMEs end up showing profits on paper yet having an empty bank account — not because clients don't pay, but because they pay on a different schedule from when the company must pay its own suppliers.

This mismatch between collections and payments is one of the most common and underestimated problems in SMEs. Cash flow doesn't depend only on how much you bill, but on when you collect.

How does the problem develop?

The mechanism is simple:

Clients pay at 60, 90, or 120 days — large companies often impose these terms
Suppliers want money at 30 days — or even upfront for raw materials
Salaries are paid every month — without exception, and the real cost of an employee is often higher than expected
Taxes follow fixed deadlines — VAT, social contributions, installments

The result: the company spends before it collects. Every month of delayed client payment is liquidity that's missing.

A concrete example

A company with €3.5M annual revenue and a 20% margin:

Item	Timing	Cash impact
Client collections	Average 90 days	€ 875,000 always "in transit"
Supplier payments	Average 30 days	Immediate outflow
Salaries	Monthly	Fixed outflow
Taxes and contributions	Fixed deadlines	Concentrated outflow

With €875,000 in receivables constantly outstanding, the company must finance this gap with its own resources or a bank credit line. If the credit line isn't enough and savings run out, a liquidity crisis arrives — even though the balance sheet shows a profit.

How to measure the problem?

Two indicators make the mismatch visible:

DSO (Days Sales Outstanding) — how many days on average clients take to pay. Formula: (Receivables / Annual revenue) × 365

DPO (Days Payable Outstanding) — how many days on average the company takes to pay suppliers. Formula: (Payables / Annual purchases) × 365

The DSO – DPO gap is the number of days the company must finance with its own resources. If DSO = 90 and DPO = 30, the gap is 60 days. On €3.5M revenue, that's roughly €575,000 in permanent financing needs.

What actions can reduce the gap?

No need to overhaul the business model. Targeted actions on both fronts are enough:

Reduce DSO (accelerate collections)

Invoice immediately — every day between delivery and invoice issuance is a day lost. Automating invoicing is the first step
Early payment discounts — a 2% discount for payment at 15 days can be cheaper than the cost of a bank credit line
Structured reminders — don't wait for the due date. An automatic reminder 7 days before and one the day after make a difference
Select clients — a client who consistently pays at 120 days has a real financial cost. It should be factored into the margin per client
Factor invoices — invoice factoring has a cost, but it's often less than a liquidity crisis

Extend DPO (negotiate better terms)

Renegotiate with key suppliers — moving from 30 to 60 days is possible, especially with suppliers you have a long-standing relationship with
Consolidate purchases — a supplier receiving larger orders is more willing to grant better terms
Don't pay before you have to — it sounds obvious, but many companies pay invoices as soon as they arrive rather than at maturity

How to forecast cash flow at 30 days

The forecast doesn't need to be complex. A sheet updated weekly with:

Current balance in the bank account
Expected collections — invoices issued with due dates in the next 30 days
Expected payments — suppliers, salaries, taxes, loan installments

The result is the projected 30-day cash balance — one of the 5 essential numbers to check every week.

If the projected balance drops below a safety threshold (e.g., 2 months of fixed costs), it's time to act: push for collections, negotiate a deferred payment, or activate the credit line.

The connection with growth

The problem amplifies when the company grows. If revenue increases by 20%, receivables also increase proportionally — and financing needs grow. Rapid growth without careful cash management can lead to a paradoxical crisis: the company is doing well, but can't afford to pay its suppliers.

That's why management control always includes cash forecasting, not just margin analysis. A company can be profitable and insolvent at the same time.

The cash flow guide for SMEs covers the complete path to building a structured and reliable liquidity management system.

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