Profit and cash are measured differently. Your profit counts sales when you invoice and expenses when you incur them, while cash only moves when money actually comes in and goes out. When customers pay slowly, stock or unbilled work builds up, loan repayments and asset purchases come out of the bank, or GST and tax fall due, a profitable business can still run short of cash.
Where the Cash in a Profitable Business Usually Goes
The most common gap is money you’re owed. A sale shows as profit the day you invoice, but the cash arrives 30, 60 or 90 days later. If customers stretch their terms, your profit and loss looks healthy while your bank account doesn’t. Work in progress has the same effect: unbilled time in a law firm, or progress claims and retentions on a building job, are earned but not yet paid.
The second gap is spending that doesn’t appear as an expense. Only the interest on a loan is an expense, while the principal repayment still leaves your account. A new vehicle or piece of equipment is depreciated over several years, but the cash goes out at once. Owner drawings work the same way.
The third gap is money that was never yours to keep. GST collected, PAYG withheld from wages and superannuation all sit in your account until they’re paid, then leave in a lump with each BAS or due date. Add income tax and PAYG instalments, and a strong quarter can be followed by a tight one.
Growth itself also uses cash. More sales usually mean more stock, more wages, and more money owed to you before any of it comes back. That’s why fast-growing businesses are often the ones feeling the squeeze.
The fix starts with reading cash alongside profit every month. A cash flow statement, a rolling forecast of the next few months, a look at how long customers take to pay, and a separate account for GST and tax will show the problem well before it becomes urgent.
Want a Clearer View of Your Cash Flow?
This is exactly the kind of question we work through in business and financial planning with our clients, alongside the financial reports worth reviewing every month. Learn more about MYC Partners Accountants, or get in touch if you’d like Kylie and the team to look at your numbers with you.
