Why a food producer with €400,000 profit has €60,869 less in the bank

The accountant slides the annual accounts across the table. Net profit €400,000, the best year ever. The director-major shareholder (DGA) opens the banking app on his phone. The balance is €60,869 lower than on the same day a year earlier, and in April the overdraft facility was used up to the limit. His first explanation is that the supermarkets pay late. The supermarkets pay after 50 days, just like last year. The revenue over which those 50 days run is €1.5 million higher, and the €350,000 filling line was paid in March.

The gap between the profit over a year and the money in the account after that year is a sum of seven lines that you can make yourself in fifteen minutes. That sum is called the indirect cash flow method. For a small private limited company it does not have to be in the annual accounts, and we see that business owners therefore rarely get to see it. We earn money from conversations about this calculation, so read the conclusions with that in mind.

Why the annual accounts of a small private limited company do not show the bridge from profit to cash

The law defines the annual accounts as the balance sheet and the profit and loss account with the notes. A cash flow statement is not part of that definition, as follows from Articles 2:361 and 2:396 of the Dutch Civil Code, government source. A private limited company (bv) that stays below two of the three legal thresholds on two consecutive balance sheet dates, including €15 million net revenue and 50 employees, is small. The obligation to include a cash flow statement comes from the Dutch Accounting Standards (Richtlijnen voor de Jaarverslaggeving, RJ 360) and applies from the medium-sized regime upwards, as Bosch (2025) describes in Accountant, trade journal. The company in this article, with €8 million revenue and 45 employees, falls outside that.

Dechow, Kothari and Watts (1998), peer reviewed, build a model in which the difference between profit and cash flow runs exclusively through working capital items, with receivables and stock on one side and payables on the other. They conclude that profit predicts future operating cash flow better than current cash flow does, and that this difference moves with the operating cash cycle. In the English-language literature this difference is called cash flow versus profit: receivables and stock minus payables are the working capital, and what remains after investments and repayment is the free cash flow. For the owner of a small private limited company the question is simpler. His annual accounts only contain the profit, and the difference between profit and cash flow in this example is €460,869.

The worked example: from €400,000 profit to €60,869 less cash

In this worked example, a producer of sauces and dressings, largely private label for supermarkets and foodservice wholesalers, makes €8 million in revenue over the past year. The year before, it was €6.5 million. Growth is €1.5 million, 23.1 percent. The profit and loss account:

The rates are those of the Dutch Tax Administration for 2026, government source: 19 percent up to and including €200,000 and 25.8 percent above that. The net margin in this example is 5 percent. The EBITDA of €840,000 does not come in as cash this year: after working capital, investment, repayment and tax, there is €60,869 less in the bank than at the start of the year.

The company is paid by supermarkets and wholesalers after 50 days on average (DSO 50). It holds 55 days of purchase value in stock, from raw materials to finished product (DIO 55). It pays its own suppliers after 30 days (DPO 30). Those days were the same last year; only revenue grew. On sales it charges 9 percent VAT, the rate the Dutch Tax Administration, government source, applies to food. On packaging it pays 21 percent. During the year a new €350,000 filling line was installed, paid from own funds. €150,000 was repaid on the existing bank loan. The DGA did not take a dividend.

The bridge from profit to cash using the indirect cash flow method, amounts in euros:

The bank account ends €60,869 lower than it started. The €400,000 profit does exist. It sits in receivables (€223,973), in stock (€135,617), in the filling line (€350,000) and in the repayment to the bank (€150,000). Against those €859,590 of outgoing items stand €798,721 of incoming ones: the profit, the depreciation, the extra supplier credit and the tax liability.

What each line of the bridge does, and where it sits in the annual accounts

Depreciation is the easiest case. The €280,000 is a cost for machines paid for in earlier years, so it is added back to profit. The line below it, the €350,000 investment, is the mirror image: that money was spent this year and appears nowhere in the profit and loss account. In the annual accounts you only see that property, plant and equipment rose by €70,000 (350,000 added, 280,000 deducted). How deep the cash dip from an investment goes in the first year is explained in what a machine does to cash in year one.

Receivables are the largest item. Every euro of revenue is outstanding for 50 days on average, including 9 percent VAT, and with €8 million revenue that is €1,194,521. Last year, at €6.5 million, it was €970,548. The difference of €223,973 is revenue that is already in profit and not yet in the bank. For a food supplier those days are capped. Under the Wet oneerlijke handelspraktijken landbouw- en voedselvoorzieningsketen (the Dutch Act on unfair trading practices in the agricultural and food supply chain), government source, a buyer acts unlawfully if it pays for perishable products later than 30 days after the delivery period, and for other agricultural and food products later than 60 days after the delivery date. The company in the example, at 50 days, is within those 60.

Stock works the same way. Everything in store, from raw materials to finished product, is worth €723,288 at 55 days and €4.8 million of purchases. Growth required an extra €135,617 for this. Those euros have been paid to suppliers and only come back when the product is sold and the invoice paid. How those two items together form the cash conversion cycle, and what happens when imports are added, is explained in the cash conversion cycle of an importing wholesaler.

Payables are the only working capital item that generates money during growth. More purchasing means more invoices not yet paid, in the example €82,406 of extra supplier credit. That covers almost a quarter of the extra receivables and stock together (€359,590). On balance, every extra euro of revenue in this example costs 18.5 cents of working capital: €277,184 on €1.5 million of growth.

The €150,000 repayment appears on the balance sheet, where the loan becomes smaller. The profit and loss account only shows the €39,245 of interest. A company that repays €750,000 over five years sees €150,000 of its profit go to the bank every year without it appearing anywhere as a cost.

Tax is the line that surprises most often in our conversations, because it generates money this year. According to the Dutch Tax Administration, government source, the provisional corporate income tax assessment (voorlopige aanslag vennootschapsbelasting) arrives at the beginning of the year and is a provisional calculation based on data from previous years. It may be paid in equal monthly instalments, with 31 December as the final date for the whole amount. In the example, last year's profit was €380,000 before tax, so the provisional assessment for this year was €84,440. The actual tax for this year is €120,755. The difference of €36,315 sits as a liability on the balance sheet and is paid after the tax return, so next year. Next year the new provisional assessment is added, which will then be based on this year's profit: €120,755. Together that is €157,070 of tax in one calendar year, €72,630 more than this year, on a profit that has already been spent on receivables and stock. How that delay works the other way in a loss year is explained in the provisional assessment in a loss year.

How fast you can grow without extra bank credit: the 18 percent growth limit

Higgins (1977), peer reviewed, published the sustainable growth rate in Financial Management. In the usual formulation, that is the revenue growth a company can sustain without raising new equity and with a constant ratio between debt and equity. In that formula the bank grows along: for every extra euro of equity from retained profit, the company borrows proportionally more. Churchill and Mullins (2001) describe in Harvard Business Review, trade journal, the variant without that assumption. Their self-financeable growth rate is the growth a company can pay for from its own cash flow, determined by the operating cash cycle and by the cash tied up per euro of revenue against the cash released per euro of revenue. They write that a profitable company that tries to grow too fast can run out of money, even if its products are a great success.

The company in the example has €716,315 of cash from operations before working capital this year: profit and depreciation together €680,000, plus the €36,315 of tax that only goes out next year. Of that, €350,000 of investment and €150,000 of repayment are fixed, leaving €216,315 for working capital. At 18.5 cents per extra euro of revenue (0.1848, rounded), that carries €1,170,604 of growth, 18.0 percent of last year's €6.5 million. The company grew €1.5 million, 23.1 percent. The €329,396 of revenue above the limit cost €60,869 of cash, and that is the amount that filled the overdraft facility. With a DSO of 45 days instead of 50, the limit would have been 19.6 percent.

If you calculate using the Higgins variant, you arrive at a higher figure. With €1.6 million of equity at the start of the year, the return on equity is 25 percent, and without dividend the formula gives a sustainable growth of 33 percent. The difference from the 18 percent above is the bank. Higgins assumes a loan that grows along; the company in the example repaid €150,000 and did not get a new limit. The gap between 33 and 18 percent is a financing choice that nobody in the example made consciously. Baños-Caballero, García-Teruel and Martínez-Solano (2014), peer reviewed, find among UK non-financial companies an optimal working capital level that is lower for companies that are likely to be financially constrained. For an €8 million bv with a fixed credit limit this means: the same 50 days of receivables that a competitor with a more generous bank can carry are too many for this company. Had the payment term crept up to the legal 60 days, the growth limit would have been 15.5 percent.

That revenue grows faster in euros than in kilos does not make the calculation smaller. In the Macro Economic Outlook (Macro Economische Verkenning) of 15 September 2026, the Centraal Planbureau (CPB Netherlands Bureau for Economic Policy Analysis), government source, forecasts inflation at 3.3 percent for 2026 and 2.7 percent for 2027. A producer that passes on its raw material prices and therefore turns over 3 percent more at the same volume has 3 percent more receivables and stock as a result, at a margin that does not move with it.

What the annual figure averages away: April

The bridge above compares two balance sheet dates, 31 December against 31 December. In between lies a year in which cash has been deeper than €60,869. In this worked example, the producer builds up stock in March and April for the barbecue season. Stock then rises to 75 days of purchase value, €986,301, €263,013 above the year-end level of €723,288. That money was paid to suppliers in April and only comes back through receivables in July and August.

On top of that comes the VAT on the filling line: 21 percent on €350,000 is €73,500, paid with the invoice in March and reclaimed in the VAT return for the first quarter. According to the Dutch Tax Administration, government source, that return is filed at the latest on the last day of the month after the quarter. A quarterly filer therefore gets that money back in May at the earliest. In April, the overdraft facility in this example is €336,513 deeper than the annual figure shows.

What is acceptable, and when you know it

The bridge yields four tests, each with its own moment in the year. The limits in the third column are what we use as workable with clients:

The first test is the most important, and it is the one we see done least. A budget that plans 23 percent growth at a 5 percent net margin is a budget that falls €60,869 short in cash, and that figure can already be calculated in November.

When this does not apply

For a company with €1.2 million in the bank and no credit, the bridge is only an explanation: cash falls by €60,869 to €1,139,131, and the profit sits in assets that will generate money next year. Had the company financed the filling line with a loan of €280,000, cash would have risen by €219,131 this year, if the first repayment only falls next year. The bridge then gets an eighth line, loans drawn added, and the problem shifts to the repayment in the years after.

The model also assumes growth. With revenue falling from €8 million to €7 million, €184,790 of working capital is released in this example, and cash improves while profit falls. As soon as revenue picks up again, that working capital has to go back in at once.

Dividend is not in the calculation. Had the DGA in the example paid out €100,000, cash would have fallen by €160,869, with the same profit and the same growth. The dividend line belongs in the bridge, and in the April cash planning.

And it uses fixed days. A producer that wins a large retail customer with a 60-day payment term and at the same time stocks up on new packaging changes the 18.5 cents per euro.

How to prepare a cash flow statement yourself using the indirect method, in fifteen minutes

The rigorous method is a monthly cash flow forecast for the whole company in which receivables, stock, payables, investments, repayments and tax instalments run as separate lines, twelve months ahead. That is what we make for clients, and so we have an interest in it. How such a rolling forecast works is explained in the knowledge base. The do-it-yourself version is smaller and captures most of it.

That version starts with this year's balance sheet and last year's side by side. The calculation starts with net profit. Depreciation is added. The increase in receivables and stock is deducted. The increase in payables and in the tax liability is added. Investments and repayments are deducted. What remains should equal the difference in the bank balance. If it does not, the difference lies in dividend, in a current account with the DGA, in a loan you overlooked or in accruals and deferrals, and that is the first question for your accountant.

In this example, one day of DSO is €23,890 (8 million times 1.09 divided by 365). Going from 50 to 45 days saves €119,452, almost twice the year's cash shortfall. One day of stock is €13,151 (4.8 million divided by 365); from 55 to 50 days is €65,753.

Had the €350,000 filling line been 80 percent financed with a five-year loan, €280,000 less would have come out of cash this year, with €56,000 of repayment a year over the next five years, plus interest. Whether that is sensible depends on the April dip and on the solvency ratio the bank requires.

The difference between actual tax and the provisional assessment should be set aside as soon as the interim figures show it, in the example €36,315 after the third quarter. Next year's provisional assessment (€120,755) already belongs in the cash planning now. A request for a higher provisional assessment when profit clearly exceeds last year costs cash this year and saves €157,070 falling due at once next year.

The conversation with the bank belongs before the year starts. A credit application with the bridge attached, stating that 23 percent growth at 18.5 cents of working capital per euro requires €60,869 of extra limit, is a different conversation from a phone call in April. How a growing company gets stuck at the bank if it does not have that conversation is explained in how an installation company gets stuck at the bank because of growth. The growth side of the same mechanism is covered in cash flow as a brake on growth.

Tax and legal: the questions for your adviser

This article describes the rules as the Dutch Tax Administration and the law publish them and does not give tax or legal advice. The questions that follow from the worked example and that you put to your accountant or tax adviser: should this year's provisional assessment go up now that profit exceeds last year, and what happens with tax interest if it does not; does the filling line qualify for the small-scale investment allowance (kleinschaligheidsinvesteringsaftrek, KIA) or the Energy Investment Allowance (EIA), and in which year; is a switch to monthly VAT returns possible in the year of a large investment; and does the statutory payment term of 30 or 60 days apply to the products this company supplies, and to which buyers.

Further reading: cash flow as a brake on growth, the installation company that gets stuck at the bank because of growth, the cash conversion cycle of an importing wholesaler, what a machine does to cash in year one and rolling forecasts. New: What one day of working capital is worth to a metal supplier with €10 million revenue, and which lever to pull first.

Frequently asked questions about profit that is not in the bank

I made €400,000 profit, but my bank balance is lower than last year. How is that possible?

Profit and cash measure two different things. Profit is the result over the year; cash is what is left after receivables, stock, investments, loan repayments and tax instalments. In the worked example, the €400,000 profit sits in €223,973 of extra receivables, €135,617 of extra stock, a €350,000 filling line and €150,000 of repayment to the bank. On balance, cash falls by €60,869.

What is the difference between net profit and cash flow in a private limited company?

Net profit is revenue minus costs minus tax over a period, regardless of when the money was received or paid. Cash flow is the actual difference between what came into the bank and what went out. In between are depreciation, working capital, investments and repayments, and the difference between the tax for the year and the tax paid in the year. In the example that totals €460,869.

How do I prepare a cash flow statement myself using the indirect method if my accountant does not provide one?

You put this year's balance sheet next to last year's. The calculation starts with net profit. Depreciation and the increase in payables and tax liabilities are added, the increase in receivables and stock and the investments and repayments are deducted. The outcome is the change in your bank balance.

Why is there no cash flow statement in the annual accounts of my small private limited company?

A small private limited company (bv) does not have to include a cash flow statement, because the Dutch Civil Code defines the annual accounts as the balance sheet and profit and loss account with notes, and the obligation to include a cash flow statement only applies through the Dutch Accounting Standards (RJ 360) from the medium-sized regime upwards. A bv that stays below two of the three legal thresholds on two consecutive balance sheet dates, including €15 million net revenue and 50 employees, is small and does not have to include one.

Why does growth cost money while I am making a profit?

Growth costs money because every extra euro of revenue first goes into receivables and stock before it comes in as cash. In the example, every extra euro of revenue costs 18.5 cents of working capital. That includes 50 days of receivables and 55 days of stock; supplier credit of 30 days takes part of it off. With €1.5 million of growth that is €277,184, and that money has to come from profit or from the bank.

How fast can my business grow without extra bank credit?

Divide the cash left from operations after investments and repayments by the working capital per extra euro of revenue. In the example that is €216,315 divided by 0.1848, so €1,170,604 of revenue growth, 18 percent. Churchill and Mullins (2001) call this the self-financeable growth rate. Higgins's (1977) sustainable growth rate comes out at 33 percent in the same example, because that formula assumes the bank lends proportionally alongside.

Which items prevent profit from ending up as money in the bank?

Seven items: depreciation (added), the increase in receivables and in stock (deducted), the increase in payables (added), investments and repayments (deducted) and the difference between the tax for the year and the provisional assessment paid. In the worked example, those seven lines add up to €460,869 between €400,000 profit and €60,869 less cash.

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