We're Making a Profit. So Why Is There Never Any Money in the Bank?

The experience described in this article is from Gayle’s previous roles, not a Clear Consulting Partners client case study.

It's a question that comes up surprisingly often.

The business is busy. Sales are increasing. The profit and loss report looks healthy.

Your accountant tells you the business has made a profit. Excellent news!

Although that also means you might have a rather healthy tax bill coming.

And of course, there's always the reassuring reminder that "you only pay tax when you're making money."

Which is lovely, but not particularly helpful when you're wondering how you're going to pay the next round of wages.

So why does the bank account seem to disagree with your accountant?

And why does every pay run, supplier payment or quarterly BAS bill seem to arrive at precisely the wrong time?

The answer often comes down to something surprisingly simple.

Profit and cash flow are not the same thing.

Understanding the difference can help you make better decisions, avoid unpleasant surprises and spend considerably less time wondering where all the money went.

Profit is not the same as cash in the bank

Let's use a simple example.

Your business completes $100,000 worth of work in a month.

You've incurred $65,000 in operating expenses, leaving you with a $35,000 profit.

Not bad.

But there's a catch.

Of that $100,000 in sales, your customers have only paid $55,000.

Meanwhile, you've paid the full $65,000 in expenses.

Your business has made a $35,000 accounting profit but has $10,000 less cash than it started with.

The remaining $45,000 is sitting in accounts receivable. You've earned it, invoiced it and hopefully will receive it.

But you can't pay your employees with an outstanding invoice.

This is a simplified example, but it demonstrates why looking at your profit and loss statement alone won't tell you whether you've got enough cash to meet your commitments.

So where is the money going?

There are several common reasons businesses can be profitable but short of cash.

1. Your customers haven't paid you

This is often the first place I'd look.

You've completed the work, issued the invoice and recorded the revenue.

But until your customer pays, the cash isn't there.

And if your customers are taking 45, 60 or even 90 days to pay, that's a substantial amount of money tied up in outstanding invoices.

Consider a business invoicing $200,000 a month.

If customers are taking an average of 60 days to pay rather than 30, that's roughly another $200,000 sitting in receivables instead of the bank, assuming a consistent level of credit sales.

That's a lot of money to have effectively lent to your customers, often interest-free.

What can help?

Start with visibility.

Do you know how much customers owe you? How much is overdue? Which customers consistently pay late?

Review your payment terms, invoicing processes and collection practices.

Could invoices be issued sooner? Should you be requesting deposits or progress payments? Is someone actually following up overdue invoices?

I've worked with a business where improving reporting, collection processes and accountability helped reduce debtor days from more than 60 to approximately 40.

That meant cash coming into the business sooner, without needing to generate additional sales.

Sometimes improving cash flow isn't about selling more. It's about collecting the money you've already earned.

2. Your business is growing

Growth is generally a good thing.

But it can also be surprisingly expensive.

More customers might mean hiring additional employees, purchasing more stock, increasing production or investing in systems and equipment.

Often those costs need to be paid well before the additional revenue turns into cash.

You might be delighted to have won a major new customer, only to discover you need to fund another two employees and a substantial increase in supplier costs for the next two months before receiving payment.

The faster the business grows, the more working capital it may need.

Which creates an interesting situation where the business is performing better than ever, but the bank balance is getting progressively tighter.

Growth doesn't automatically fund itself.

What can help?

Understand how much cash you'll need to support growth before committing to additional expenses.

Forecast sales, customer receipts, wages and supplier payments together.

Knowing that sales are expected to increase by 30% is useful.

Knowing how much cash you'll need to fund that growth, and when, is far more useful.

3. You're making loan repayments

Another common source of confusion is debt repayments.

You might be paying $10,000 a month towards a business loan.

But not all of that $10,000 appears as an expense in your profit and loss statement.

The interest component is generally an expense. The principal repayment reduces the outstanding loan balance.

Both reduce your bank balance.

So your business might report a healthy profit while a significant portion of your available cash is going towards loan repayments.

What can help?

Include scheduled loan repayments in your cash flow forecast.

When reviewing business performance, look at both profitability and the cash required to service existing debt.

4. You've invested in equipment or other assets

Perhaps you've purchased new computers, vehicles, equipment or technology.

These might be sensible investments that help your business operate more efficiently or expand its capacity.

But depending on how the purchase is accounted for, the full amount might not appear immediately as an expense in your profit and loss statement.

The cash, however, has still left your bank account.

And unlike accounting depreciation, the supplier generally expects actual dollars.

What can help?

Plan significant purchases as part of your cash flow forecast, not just your expense budget.

Consider the timing of the investment, when the benefits are expected and whether existing cash reserves can comfortably support it.

5. You've got tax and other periodic payments coming

Quarterly obligations have a remarkable ability to arrive just when you think the bank balance is looking healthy.

GST, PAYG withholding, superannuation, income tax and other obligations can all affect when cash needs to leave the business.

Some payments relate to amounts already collected or withheld. Others relate to profits earned in earlier periods.

Either way, the timing can have a significant impact on available cash.

The fact that the money happens to be sitting in the bank today doesn't necessarily mean it's available to spend.

What can help?

Maintain a forward-looking schedule of upcoming obligations.

Make sure your cash flow forecast reflects when amounts are actually payable.

Work with your accountant or tax agent to understand your expected liabilities and consider setting money aside regularly.

A bank balance of $100,000 is considerably less exciting when $60,000 of it is already committed to upcoming payments.

6. You're holding too much stock or unfinished work

For product-based businesses, inventory can consume a substantial amount of cash.

You've paid suppliers for stock, but that stock hasn't necessarily been sold.

And even once it's sold, you may still be waiting for customers to pay.

The same can happen with unfinished projects, where you've incurred costs but haven't reached the point where you can invoice your customer.

What can help?

Review stock turnover, purchasing practices and demand forecasts.

For project-based businesses, look at whether deposits, milestones or progress payments could improve the timing of receipts.

Stock on a shelf might be an asset on your balance sheet.

It's not particularly helpful when payroll is due on Thursday.

7. You're taking money out of the business

Owner drawings, distributions, dividends and other withdrawals can also affect your cash position.

Depending on the business structure and how those amounts are recorded, they may not appear as ordinary operating expenses in your profit and loss statement.

The distinction matters.

A business can be profitable but still struggle to fund both its operating requirements and the cash its owners want to withdraw.

What can help?

Understand what the business can sustainably afford to distribute after allowing for operating expenses, debt repayments, tax obligations and future investment.

Make sure the accounting and tax treatment of withdrawals is appropriate for your business structure.

Profit is one consideration.

Available cash is another.

The real problem is often visibility

The individual causes of cash flow pressure aren't always particularly complicated.

The challenge is that they're often being managed separately.

Your profit and loss statement tells you one thing.

Your bank balance tells you another.

Your outstanding invoices are sitting in Xero.

Upcoming loan repayments might be in a spreadsheet.

Someone knows when the next major supplier payment is due, although that information might currently be sitting in their inbox.

And the tax payments? Well, hopefully someone has those covered.

The information probably exists somewhere.

But unless it's brought together, you're making decisions without a clear picture of what's actually happening.

That's where a useful cash flow forecast makes a difference.

You don't need a complicated financial model

For many small and growing businesses, a straightforward rolling cash flow forecast is a good starting point.

A 13-week cash flow forecast provides visibility over the next three months, showing the expected timing of money coming in and going out.

It should help you understand:

• How much money is currently available.
• What cash you expect to receive, and when.
• What payments are coming up.
• When your bank balance is likely to be at its lowest.
• Whether you'll have enough cash to meet planned commitments.

Here's a simple example.

A forecast like this can help you identify potential problems before they happen.

It doesn't need to be a masterpiece of spreadsheet engineering.

It does need to be based on realistic assumptions, reviewed regularly and updated as circumstances change.

A forecast showing that you should have $100,000 in the bank next month isn't much use if half the expected customer payments are already three weeks overdue.

It's also important to look beyond the forecast closing balance. Are customers actually paying when expected? Have supplier costs increased? Have you committed to something that wasn't in the original forecast?

A cash flow forecast isn't something you prepare once and admire.

It's something you use.

Better information leads to better decisions

Cash flow forecasting is only part of the picture.

It's also important to understand what's driving the numbers.

If receivables are increasing, is it because sales have grown or customers are paying more slowly?

If expenses are increasing, is that supporting additional profitable revenue, or have costs gradually crept up without anyone noticing?

If your business is profitable but using cash every month, is that temporary because of planned investment, or is there a more fundamental issue?

And importantly, what can you do about it?

This is where regular management reporting makes a difference.

Not reporting for the sake of producing another spreadsheet.

Reporting that helps you see what's happening, understand why and make decisions while there's still time to influence the outcome.

A profitable business should still be able to pay its bills

Making a profit is important.

But profit alone doesn't guarantee that your business has enough cash available to operate comfortably.

And if you're constantly surprised by the bank balance, that's usually a sign that you need better visibility over the timing of money coming in and going out.

Your financial information should help you understand what's happening, anticipate what comes next and make decisions with confidence.

Not simply tell you, several weeks after the fact, that last month was actually quite profitable.

Which is lovely, of course.

But somewhat less reassuring when you've got wages to pay tomorrow.

Frequently asked questions

Can a business be profitable but have negative cash flow?

Yes. A business can recognise revenue before customers pay, invest in stock or equipment, repay debt or make owner distributions that reduce available cash.

Profit measures financial performance. Cash flow measures money actually moving into and out of the business.

What is a 13-week cash flow forecast?

It's a short-term forecast showing expected cash receipts, payments and bank balances over the next 13 weeks.

It helps businesses anticipate potential cash shortfalls and make decisions before payments become urgent.

Can Xero help identify cash flow problems?

Yes. Xero provides useful information through its profit and loss, balance sheet, aged receivables, aged payables and cash reporting.

But having the reports is only half the job. The real value comes from understanding what they're telling you and using that information to plan ahead.

What if my business is struggling to pay its bills?

Start by understanding your current cash position, outstanding customer payments and immediate commitments.

If your business cannot pay debts as they fall due, seek prompt advice from an appropriately qualified restructuring or insolvency professional. A cash flow forecast helps with visibility, but it won't resolve an underlying solvency problem by itself.

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