Businessmaidav Basics
Revenue Is Not Profit: Why Businesses Still Run Short of Cash
A full order book and yet a tight bank balance: how revenue, profit and liquidity are connected, and where the money gets held up.
A business can earn good money and still struggle to pay wages and suppliers at the end of the month. The reason usually lies not in the business itself but in the time gap between work and payment. This article separates revenue, contribution margin, profit and liquidity, shows in a worked example where the money gets held up, and presents the levers that make a company’s ability to pay more predictable.
Four terms, four questions
Revenue is the total income from goods and services sold, usually calculated without VAT. It shows how much a company has invoiced, but not how much of it is left over. Deducting the variable costs, that is the costs incurred with each order such as materials, subcontracted services or commissions, gives the contribution margin. It shows how much each order contributes to covering the fixed costs, such as rent, administration, vehicles and fixed salaries.
Profit only arises once the fixed costs are covered too. The result of the core business is, in simple terms, the operating profit (Betriebsergebnis). After interest and taxes, the net profit for the year (Jahresüberschuss) appears in the profit and loss account at the end of the financial year. The Break-even calculator estimates the revenue at which the fixed costs are covered.
The fourth figure follows a different logic. Liquidity is the ability to pay bills on time when they fall due. Cash flow measures how much money actually came in and went out over a period; the bank balance shows the amount on a given day. Profit is a figure from the accounts, liquidity a figure from the bank account. The two are connected, but they rarely move in step.
Why the profit is not in the bank account
The most important reason is timing. Revenue is booked when the work has been done and invoiced, but the money only arrives when the customer pays. A business granting 30 or 60 days’ payment terms finances its customers for that time. Outstanding receivables appear as assets on the balance sheet, but they pay neither wages nor suppliers.
Stock has a similar effect. Materials and goods are bought and paid for before they are sold. As long as they sit in the warehouse, the money is tied up, yet the costs only affect the result once the goods are used or sold. With longer orders, wages also fall due every month, while the final invoice only goes out at the end.
Investments shift the balance even more clearly. If a business buys a machine for 60,000 euros with a useful life of six years, the money leaves the account immediately. With straight-line depreciation, however, the result shows only the notional loss in value of 10,000 euros a year. The reverse applies to loans: repaying the principal reduces the bank balance but not the profit, because only the interest counts as an expense.
Taxes with fixed deadlines
For businesses, VAT (Umsatzsteuer) is economically a pass-through item: it is collected from the customer and, after deduction of input VAT, passed on to the tax office. In the bank account, it initially looks like the company’s own money. Under section 18 of the German VAT Act (UStG), the advance VAT return must be submitted by the tenth day after the end of the return period, and the payment is due the same day, monthly or quarterly depending on the previous year’s tax.
Under taxation on agreed consideration, known in Germany as Sollversteuerung, VAT arises at the end of the return period in which the service was performed, even if the customer has not yet paid. Among others, businesses whose total turnover in the previous year did not exceed 800,000 euros can apply under section 20 UStG to calculate the tax on the basis of consideration received. The tax then depends on when payment comes in.
On top of this come income tax prepayments, which under section 37 of the German Income Tax Act (EStG) fall due on 10 March, 10 June, 10 September and 10 December, as well as trade tax (Gewerbesteuer) prepayments on 15 February, 15 May, 15 August and 15 November. The amounts are usually based on the most recently assessed year. After a strong year they can rise, even if current business is quieter. If a lower result is on the horizon, an adjustment can be requested.
Growth ties up capital
It seems paradoxical at first that growing businesses in particular are often short of cash. More orders mean more material in stock, more wages paid in advance and more outstanding receivables. The capital locked up in these items is called working capital. Put simply, it is stock and receivables minus short-term liabilities to suppliers.
If revenue rises sharply, the capital tied up often grows in a similar proportion, while the additional profit only comes in later. Anyone planning a strong year therefore does well to calculate not only the earnings but also how much money the path there ties up and where it comes from: from reserves, from a credit line or from better payment terms.
One order over time
A simplified example with round, invented figures shows how large the gap can become. A business receives an order worth 100,000 euros net. The material is ordered and paid for in the first month, the work takes two months, and the invoice goes out at the end of the second month with payment terms of 60 days. All figures are exclusive of VAT.
| Order value, net | €100,000 |
|---|---|
| Material, paid in the first month | €45,000 |
| Wages in the first and second month | €30,000 |
| Share of overheads | €15,000 |
| Profit as calculated | €10,000 |
| Payment received | End of the fourth month |
| Pre-financing without a deposit | €90,000 |
| Pre-financing with a 30 % deposit | €60,000 |
The profit of 10,000 euros is in the books on completion and invoicing, but the money only arrives around four months after the first outlay. Until then, the business has to bridge up to 90,000 euros from reserves or a credit line. A deposit of 30 per cent when the order is placed reduces this amount to 60,000 euros.
Profit shows whether a business pays off; liquidity shows whether the firm can see it through.
Levers for greater predictability
Many of the levers lie in your own terms of contract. Under section 632a of the German Civil Code (BGB), a contractor working under a contract for work (Werkvertrag) can demand interim payments equal to the value of the work already performed and owed under the contract. Deposits when the order is placed, interim invoices based on progress and shorter payment terms all shorten the time in which a business pre-finances its work.
- Issue invoices straight after the work is done, not in a batch at the end of the month
- Agree deposits and interim payments in the quotation itself
- Choose payment terms deliberately and keep them shorter for new customers
- Set up a credit control process with fixed stages and deadlines
- Take up suppliers’ early payment discounts when liquidity allows
- Review stock regularly for rarely used items
The law helps with credit control: between businesses, under section 286 (3) BGB, the debtor of a payment claim is in default at the latest if they do not pay within 30 days of the due date and receipt of the invoice. Default interest is then nine percentage points above the base rate (Basiszinssatz). Early payment discounts (Skonto) are worth more than they sound: anyone who passes up a 2 per cent discount for payment within ten days and only pays after 30 days is effectively paying around 37 per cent annual interest for the 20 days’ grace.
Rolling planning over 13 weeks
The most effective protection against surprises is a rolling cash flow plan covering 13 weeks. It shows, week by week, the expected bank balance, all certain and likely incoming payments and all outgoings, from wages, rent and loan instalments to the tax deadlines. Each week the past week drops out, a new one is added, and differences between plan and actual figures become visible.
A quarter is short enough to predict payments fairly accurately and long enough to act on a foreseeable gap: talk to the bank, bring invoices forward, postpone spending. How large the permanent buffer should be is covered in the article on cash reserves for business owners.
Revenue, profit and liquidity each tell part of a company’s story. High revenue shows demand, a good profit shows a viable business, and only secure liquidity ensures that both hold up even through months with long payment terms. Anyone who regularly looks at all three figures side by side spots bottlenecks early and can finance growth deliberately instead of being caught out by it.
Frequently asked questions
Can a profitable company run into payment difficulties?
Yes, that is possible. Profit arises in the accounts when work has been performed and invoiced, whereas money only flows when payment is made. Long payment terms, high stock levels, large investments or loan repayments can drain the cash even though the result is positive. That is why many businesses plan their liquidity separately from their profit.
What is the difference between cash flow and profit?
Profit is the balance of income and expenses for a period, regardless of when payments are made. Cash flow measures the actual inflows and outflows of money. Depreciation reduces profit but not cash flow. Loan repayments and spending on investments reduce cash flow but not profit.
Is VAT part of revenue?
No. Revenue is usually reported net. The company does invoice VAT to the customer, but after deducting input VAT it pays it over to the tax office. Anyone who treats it as money available in the bank account underestimates their obligations. Many businesses therefore keep it in a separate reserve account.
Why plan exactly 13 weeks ahead?
Thirteen weeks make up one quarter. Over this period, incoming and outgoing payments can usually still be estimated reliably, and there is enough time to react to a foreseeable gap. Because the plan is rolled forward every week, it always looks the same distance ahead and stays up to date.
Terms
- Contribution margin
- Revenue minus variable costs, that is the amount that contributes to covering fixed costs and to profit.
- Working capital
- Capital tied up in day-to-day business, in simple terms stock and receivables minus short-term liabilities to suppliers.
- Cash flow forecast
- A preview of incoming and outgoing payments that shows whether a company will be able to pay its bills on time in future.
Sources
- § 18 Umsatzsteuergesetz: Besteuerungsverfahren (in German)Bundesministerium der Justiz
- § 20 Umsatzsteuergesetz: Berechnung der Steuer nach vereinnahmten Entgelten (in German)Bundesministerium der Justiz
- § 37 Einkommensteuergesetz: Einkommensteuer-Vorauszahlung (in German)Bundesministerium der Justiz
- Section 286 German Civil Code: Default of the obligorBundesministerium der Justiz
- Section 632a German Civil Code: Part paymentsBundesministerium der Justiz
Image: illustration, created with AI.
