When I tried to think of a time when a business looked profitable but there was no cash in the bank, I could not come up with one dramatic example.
What I remembered first was something slightly different.
When one coffee shop becomes several shops, it is easy to look at the stores and think they are making good money. Then another layer starts to appear around them.
Someone has to manage the stores. Design work has to happen. Websites, marketing, reports and other support work have to happen. Some of that may be done by employees and some may be outsourced, but either way it costs money.
Those costs are not attached to one cup of coffee or one bag of beans in an obvious way. They sit above the stores.
If that layer becomes too heavy, a store can still look healthy while the company makes much less than you thought.
That is not exactly the same thing as profit being different from cash. It comes one step before that. It is a reminder that I first need to be clear about what I mean when I say the business is profitable.
It is also part of why I am doing so much myself with Filgap now. If I outsourced every piece of design, website work, social media and planning at this stage, those costs would still belong to the business even if the Farmers’ Market booth itself seemed to be making money.
The bank balance tells me something different
When I looked again at the 2024 Filgap financial model, I could see that I had already separated some of these questions.
The model calculated operating results and net income, but then other cash movements continued below that.
Equipment and other capital purchases needed cash. Loan principal needed cash. Money put into the company through financing increased cash even though it was not sales.
I do not need a complicated accounting explanation to understand the practical difference.
If the business earns money and uses some of that cash to repay loan principal, the bank balance goes down. The debt goes down too. I would not look at the lower bank balance by itself and conclude that the business lost money. It may simply have used cash to reduce something it owed.
And borrowed money can make the bank account look much healthier without meaning the business suddenly became profitable.
So for me, profit and cash are not competing answers. I need both because they tell me different things about the same business.
For Filgap, cash starts leaving before the sale
At the Farmers’ Market stage, the customer side should be fairly simple. I sell the coffee and get paid at the time of the sale.
The cash commitment starts before that.
I have to buy green coffee before I can roast it. I need bags before I can package it. I need enough finished inventory ready before I know exactly how much I will sell on Saturday.
That brings me back to a simple idea: inventory is money.
I would like to keep inventory as low as reasonably possible, but at a small scale I do not get perfect choices.
Green coffee can be expensive to buy in very small quantities. Freight matters. Supplier minimums matter. But buying too much is not automatically better either. It is an agricultural product, and I do not want to hold an unreasonable amount for too long.
Packaging has a different balance because it is not perishable in the same way. Even then, a large order means more cash sitting on the shelf.
There is no single answer I can use for every item. I have to find the best balance available at the scale I am actually operating: unit cost, freight, storage, freshness and how much cash I am tying up.
Sometimes paying a little more per unit may still be the better decision if it keeps too much cash from being locked into inventory.
Payment terms can change the same decision again.
In an established commercial relationship, a supplier may allow some time before payment is due. A new business may not have that option yet. Expensive equipment may have to be paid for before it is delivered. Some suppliers may want payment first until they know the customer better.
Of course it is better for cash flow if I can receive something and pay later. But I cannot build the first plan assuming every supplier will give me that advantage.
For the first Filgap stage, I would rather assume I need the working capital myself.
I do not want to spend from the bank balance just because the money is there
One thing is very clear to me.
Money coming into the business account is not the same as a salary arriving in a personal account.
Some of that money may already be needed for tax. Some will be needed for the next coffee order or packaging order. I also want room for maintenance and repairs, because those do not always arrive when I would prefer them to.
A machine can break. A technician may have to come. A part may need to be replaced. That kind of expense may reduce profit as well as cash, so I do not want to use it as a technical example of why accounting profit and cash are different.
For me the more useful point is simpler: if all of the cash has already been committed somewhere else, the business has no flexibility when something unexpected happens.
And sales are not a salary. Especially at the beginning, I cannot decide exactly how much money will come in each week.
That makes me more conservative about what I do with early cash.
If I already made a first-year plan and then another optional purchase appears, my instinct is to wait. If it was not important enough to be in the plan, I need a good reason to add it while the business is still giving me very little evidence.
A necessary repair is different. I may have no choice.
But another piece of equipment, another service or something that would simply be nice to add can usually wait until the sales give me a stronger reason.
That is how I think about the reserve too. I am not trying to protect one magical bank-balance number. I am trying to avoid creating a situation where one weak period or one large bill immediately changes every decision I have to make.
I would look every week, then review properly each month
I would still do the formal business review mostly by month.
There are too many other things to do in a small business to spend every day inside the financial model.
But cash is something I would glance at every week, especially in the beginning.
The weekly check is not a full analysis. I just want to know where I am.
- Are the major payments arriving when I expected?
- Is inventory taking more cash than I thought?
- Is the balance moving in a direction that makes sense with what happened that week?
Then the monthly review can put the pieces together more properly.
Some of the cash is for a business that does not exist yet
There is one more reason I would be reluctant to treat a profitable period as money available to spend.
I am not planning Filgap only to sell at the Farmers’ Market and stop there.
The DREAM series is about the longer direction too. If the first stage works, I still hope to move toward a permanent roasting space and eventually the small roastery and tasting room I have been thinking about.
That will need money.
So if Filgap begins generating surplus cash, my instinct is to leave as much of it in the business as I reasonably can. Some of it will cover obligations and operating needs. Some of it is protection. And some of it may eventually help pay for the next stage.
That is why a positive profit line would make me happy, but it would not make me feel that the money was finished doing its job.
I would still want to know what has to be paid next, what could go wrong before the next review, and what I am trying to build after the current stage.
The bank balance only makes sense to me in that bigger picture.
