A business can be profitable on paper and still struggle to pay its bills.
Sales are growing and the profit and loss statement looks healthy, yet the bank balance tells a different story. The reason: profit and cash flow measure different things.
Understanding that difference, and where cash is tied up, helps business owners plan for expenses and fund growth.
Profit measures the financial performance of a business over a particular period. It generally reflects revenue earned less the expenses incurred in generating that revenue.
Cash flow is different. It tracks the actual movement of money into and out of the business.
This distinction means a business can record revenue and profit before it has actually received the associated cash.
For example, a business may issue an invoice for $100,000. That sale may contribute to reported revenue and profit, but if the customer has 30, 60 or 90 days to pay, the cash hasn't arrived yet.
At the same time, the business still needs to meet its own financial commitments.
This timing difference can create a gap between reported profitability and available cash.
A business reporting $500,000 in profit won’t necessarily have an extra $500,000 in the bank.
Customer invoices may still be unpaid, while cash has gone towards stock, equipment, loan repayments and tax payments.
The profit and loss statement shows financial performance, but it doesn’t explain every movement in cash.
When cash is tight, the first question is often:
"Where did all the money go?"
There can be several answers.
If customers are taking longer to pay, the business may have significant amounts of cash tied up in outstanding invoices.
Sales may be increasing while the cash available to the business doesn't increase at the same pace.
Holding stock requires cash.
As a business grows, it may need to purchase additional inventory before that stock is sold and the resulting cash is collected.
Purchasing vehicles, equipment, technology or other business assets can require significant cash outflows.
These purchases may support the long-term growth of the business, but they can still reduce the amount of cash available in the short term.
Loan repayments reduce the cash available to your business, but not every part of the repayment is treated as an expense in the profit and loss statement.
GST, PAYG withholding, income tax and other liabilities can create significant cash requirements when payment falls due.
A business may need to plan for these obligations well in advance rather than relying on the cash balance at the time the bill arrives.
Growth itself can consume cash.
Additional staff, stock, premises, equipment and other operating costs may need to be funded before increased sales are converted into cash.
Growth can put pressure on cash flow because spending often increases before customer payments arrive.
More sales can mean buying extra stock, hiring staff or investing in equipment before the business collects payment. The gap between paying these costs and receiving cash from customers creates a funding need.
That’s why growth planning needs to consider cash requirements, not just expected revenue and profit.
Historical financial statements show what has happened. A cash-flow forecast helps you plan for what comes next.
A 13-week forecast maps expected receipts and payments, highlighting potential shortfalls before they occur. This gives you time to follow up invoices, review spending and consider funding options.
If the forecast shows a potential shortfall, you can:
The value is in using the forecast to guide decisions, not simply producing a spreadsheet.
There are several assumptions that can make cash-flow management more difficult.
"If we're profitable, we must have plenty of cash."
Not necessarily. Profit can be tied up in receivables, inventory and other assets.
"If sales increase, cash flow will automatically improve."
Not always. Growth can require additional working capital before the increased revenue is collected.
"The bank balance tells me how the business is performing."
The bank balance shows the cash available at a particular point in time. It doesn't explain why that cash is there or what future commitments need to be paid.
"Cash-flow forecasting is only necessary when a business is struggling."
Forecasting can also be useful for businesses that are profitable and growing. Identifying potential pressure before it occurs gives business owners more time to respond.
Profit shows how your business is performing. Cash-flow forecasting helps you assess whether it can meet upcoming commitments.
Monitor both when planning growth, investment and major spending decisions.
For a practical discussion of the relationship between profit, cash flow, growth and forecasting, watch the full webinar:
Cash Flow Isn't Profit: Why Profitable Businesses Run Out of Cash
Watch the full webinar on YouTube
If cash flow is difficult to predict, or you’re planning growth, speak with Rubiix Business Accountants about forecasting your cash needs and identifying potential gaps.