Insights · Cash flow ·
Cash flow vs profit: why a profitable business can still run short
The profit and loss says you made money. The bank account disagrees. Both can be right, because profit counts what you earned and cash counts when the money actually moved.
Where the profit goes
Take your profit for the year and walk it to your change in cash. The usual gaps are:
- Debtors grew. Sales were booked, but customers haven’t paid yet. In a growing business this gap gets bigger every month.
- Stock or work in progress grew. Materials bought and labour paid on jobs not yet billed.
- Loan principal. Repayments of principal leave the bank account but are not an expense in the P&L.
- Equipment purchases. A ute or machine is cash out today, but only depreciation (or a write-off) shows as an expense.
- Tax timing. GST and PAYG withholding collected sit in your account but belong to the ATO. Income tax on last year’s profit is paid this year.
- Owner drawings and dividends. Money taken out is not an expense either. In a company, loans to shareholders can also raise Division 7A issues.
A one-page bridge
Ask for a simple “profit to cash” bridge each quarter: profit, plus or minus the change in debtors, stock and creditors, less loan principal, equipment and drawings, equals change in cash. Once the owner can see it, the conversation changes from “where did the money go?” to “which lever do we pull?”.
The levers
- Shorter payment terms, deposits and progress claims.
- Better pricing: markup vs margin, and job costing so losses show early.
- Financing big equipment instead of paying cash; see equipment and truck finance.
- Setting tax aside weekly: how much to set aside.
- A rolling 13-week forecast.
This is the core of what a fractional CFO does: turning the accounts into decisions.
Quick answers
Can a business be profitable and still run out of cash?
Yes. Growth in debtors and stock, loan principal repayments, equipment purchases, tax timing and owner drawings all use cash without reducing profit.
What is a profit to cash bridge?
A short reconciliation from profit to the change in your bank balance, showing movements in debtors, stock, creditors, loans, equipment and drawings.
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Sources
Related
- Getting lender-ready: what a bank wants to see
- Month-end close checklist
- When to bring in a fractional CFO
- All insights
Related reading: Working capital explained · Cash flow forecasting for SMEs
General information only. This doesn’t take your circumstances into account and isn’t tax, financial or legal advice. Talk to your accountant or registered tax agent before acting. PRM is not a registered tax agent; tax agent services are provided by Australian Tax & Super Pty Ltd (TPB 25291395).