Profitable but cash poor? Why profit isn't cash
Your business is winning work, invoices are going out, and the profit and loss report looks good. Then payroll is due on Thursday and there isn’t enough in the account. It’s one of the most common situations we see, and it catches experienced business owners as often as new ones.
The reason is simple: profit is not cash.
Profit and cash measure different things
Profit is income minus expenses, usually counted when work is done and bills are incurred. Send a $20,000 invoice in June that’s paid in August, and June’s profit includes it.
Cash is the money that actually moves in and out of your bank account. In June, that invoice is worth nothing to you; you can’t pay wages with it.
The gap between the two is where businesses get into trouble.
Where the cash goes
Slow-paying customers. If your customers take 60 days and your suppliers want paying in 30, you’re funding the gap.
Growth. Winning a big job means paying for materials and labour weeks before you’re paid. Growth eats cash before it produces any. Plenty of businesses fail while busy.
Stock and work in progress. Money sitting on shelves or in half-finished jobs is profit you can’t spend.
Loan repayments and equipment. The principal part of a loan repayment, and most of the cost of equipment, don’t appear as expenses in your profit for the month, but they leave your bank account all the same.
Tax. GST you collect isn’t yours, and neither is the PAYG you withhold from wages. If it’s sitting in the same account as everything else, the BAS arrives as a nasty surprise.
Drawings. Taking more out of the business than it makes is the fastest way to run short.
Seasonal swings. Busy months need to fund the quiet ones, and they only can if the cash is put aside.
Habits that fix most of it
Read profit and cash side by side every month. Strong profit but tight cash points to slow debtors, stock or debt. Healthy cash but thin profit points to pricing or costs.
Forecast 13 weeks ahead. A simple rolling forecast of what’s coming in and going out each week shows a shortfall while there’s still time to act.
Invoice straight away and chase on day one. Clear payment terms, online payment links, deposits on larger jobs and progress claims on long ones all shorten the wait.
Set tax aside. Move GST, PAYG withholding and a percentage of profit into a separate account every week. When the BAS or tax bill arrives, the money is already there.
Match finance to the asset. Paying cash for a ute or machinery out of working capital can leave you short. Asset finance spreads the cost over the life of the asset. Judge Lending can arrange it.
Pay yourself a set amount. A regular draw or wage, reviewed quarterly, beats taking whatever’s in the account.
If you already owe the ATO
Lodge on time even if you can’t pay, because late lodgement adds penalties on top of the debt. Then talk to the ATO, or ask us to, about a payment plan. Businesses that engage early get far more flexibility than those that go quiet.
Get the numbers in front of you
Most cash flow problems are visible weeks before they bite, if someone’s looking. Our On Track and Growth packages include quarterly or monthly management reports and a meeting with an advisor to go through them, so cash flow is something you plan rather than something that happens to you. If your books aren’t current enough to tell, start with bookkeeping.