Profitable but out of cash: why profit and cash flow aren't the same

Your accountant sends through the year-end figures: a healthy profit, better than last year. That same week, you move money from your personal account to cover wages. If that feels contradictory, you’re not alone — it’s one of the most common and least understood situations in small business.

The short explanation is that profit and cash measure different things at different times. The longer explanation is more useful, because once you can see where the cash has gone, you can do something about it.

Why don’t profit and cash match?

Your profit and loss statement is usually prepared on an accrual basis. It records income when you earn it — typically when you issue an invoice — and expenses when you incur them. Your bank account runs on a cash basis: money moves when it’s actually paid or received.

Most of the time the two catch up with each other eventually. The trouble is the gap in between. If the gap is long enough, or growing, a profitable business can run out of cash while it waits.

What are the seven usual culprits?

Culprit	What happens	Effect on profit	Effect on cash
1. Customers on credit terms	You invoice now, get paid in 30–90 days	Counted now	Arrives later
2. Stock	You buy it before you sell it	Cost counted when sold	Paid when bought
3. GST collected	You hold it until your BAS is due	Not income	Leaves in a lump
4. Loan principal	Part of each repayment reduces the loan	Not an expense	Leaves every month
5. Equipment purchases	Paid up front, expensed over years	Spread out (or written off)	All at once
6. Owner’s drawings	Money you take out of the business	Not an expense (sole traders, partnerships)	Leaves the account
7. Growth	More sales need more stock, staff and receivables up front	Rises later	Falls first

1. Customers on credit terms

If you invoice other businesses on 30, 60 or 90-day terms, you’ve effectively lent them money. The sale shows in your profit the day you invoice it, but the cash turns up weeks later — sometimes later still. The average number of days customers take to pay is your debtor days, and it’s often the single biggest driver of a cash gap.

2. Stock

Stock is cash sitting on a shelf. You pay suppliers when you buy it; its cost only reaches your profit and loss when you sell it. A retailer stocking up for Christmas can be very profitable in December and very short of cash in October.

3. GST and PAYG

GST you charge customers, and PAYG you withhold from wages, belong to the ATO. They sit in your account until your BAS falls due — for quarterly lodgers, generally 28 October, 28 February, 28 April and 28 July. If that money is used to run the business in the meantime, each BAS date becomes a crunch.

4. Loan principal

When you repay a loan, only the interest is an expense. The principal reduces a liability on your balance sheet. So a business can make a healthy profit while its loan repayments drain the bank account at a faster rate than the profit suggests.

5. Equipment

Buying a vehicle or machine outright uses cash immediately. For accounting and tax purposes, its cost is usually spread over its life through depreciation, or written off in one go if it qualifies for the small business instant asset write-off. Either way, the cash has gone before the profit and loss fully reflects it.

6. Drawings

For sole traders and partnerships, the owner’s drawings aren’t an expense — they come out of profit after it’s calculated. It’s easy for drawings to exceed what the business can spare in cash, even when profit looks healthy.

7. Growth

This is the one that surprises people most. Every new customer on credit terms, every extra unit of stock and every new staff member needs funding before the extra revenue arrives. Fast-growing businesses are often the most cash-hungry of all.

What does it look like in practice?

Illustrative only; no real business. A wholesale supplier of café equipment wins two new accounts in March. Its customers pay on 45-day terms, and it pays its own supplier on delivery.

Month	Sales invoiced	Cash received	Stock paid	Wages and overheads	Profit (approx.)	Cash at month end
March	$120,000	$80,000	$90,000	$25,000	Healthy	Falls
April	$150,000	$95,000	$110,000	$28,000	Higher	Falls further
May	$160,000	$135,000	$100,000	$28,000	Higher still	Starts to recover

Figures are illustrative. Profit rises every month. Cash falls for two months before it starts to recover, because payment for March and April’s sales hasn’t landed yet. If the business’s starting balance were small, April could be the month it can’t pay a supplier — at the very moment it’s doing better than ever.

How do you measure your own gap?

1. Work out your cash conversion cycle: stock days plus debtor days, minus the days you take to pay suppliers.
2. Build a 13-week cash flow forecast: week by week, list expected cash in and cash out, including BAS, super, loan repayments and drawings.
3. Find the low point: the week your balance is lowest, and by how much it dips.
4. Stress-test it: what if your biggest customer pays two weeks late?

business.gov.au has free cash flow templates that make this easier. Once you have the low point and its size, you know exactly what problem you’re solving.

How do you close the gap?

Start by shortening it, then fund what’s left.

Shorten it:

• invoice on completion rather than at month end, and follow up promptly;
• offer easy payment methods, and consider deposits on large jobs;
• negotiate supplier terms closer to your customers’ terms;
• reduce slow-moving stock;
• hold GST and PAYG in a separate account as they come in;
• set drawings from cash flow, not from profit.

Fund what’s left:

• a line of credit for gaps that come and go;
• invoice finance if slow-paying business customers are the main cause;
• a working capital loan for a one-off gap such as a big order;
• equipment finance rather than paying cash for assets.

If you’d like to see which of these fits your cash cycle, our loan-type finder takes a minute, or you can ask a specialist directly.

Which numbers should you watch every month?

A handful of figures give early warning long before the bank balance does:

• debtor days — rising means customers are paying slower;
• stock days — rising means cash is sitting on shelves longer;
• cash balance at the low point of the month, not just at month end;
• GST and PAYG set aside versus what will be due at the next BAS;
• total weekly debt repayments as a share of weekly deposits.

Tracking these monthly takes minutes in most accounting software and tells you whether the gap is widening or narrowing.

When is it not a cash flow problem?

If your forecast shows the balance falling month after month without recovering — even after customers pay — the issue may be profitability rather than timing. Prices may be too low, costs too high, or a product line may be losing money. Finance can’t fix that; it can only delay the moment you notice. A good accountant can help you tell the difference.

Ready to stop funding growth from your own pocket?

Being profitable and short of cash is frustrating, but it’s usually a timing problem with a practical solution. Tell us about your business in about 60 seconds — there’s no credit check when you first enquire, and we don’t spray your details across a list of lenders. A real person looks at your cash cycle and calls you with options that fit. Please answer the form accurately, especially your turnover and how your customers pay, so we can match the right facility first time.

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