Quick answer
Cash flow is the money actually moving into and out of a business over a period, such as a week, month or quarter. Positive cash flow means more came in than went out; negative means the reverse. It differs from profit because sales on credit, stock purchases, GST, tax and loan repayments all change the bank balance at different times from when income and expenses are recorded.
Key points
- Cash flow tracks the bank balance, not the profit figure on your tax return
- Slow-paying customers, stock build-ups and quarterly BAS are the usual reasons profit and cash drift apart
- Many non-bank lenders assess repayment ability straight from six to twelve months of business bank statements
- A short-term gap in cash is a timing problem, and timing problems have finance products built for them
Ask an owner how the business is going and they’ll often answer with sales. Ask their bookkeeper and you’ll hear about cash. Cash flow is simply the record of dollars arriving in and leaving the business bank account over a set period, and it’s the number that decides whether wages, rent and suppliers get paid on Friday.
How does a business with healthy profits end up short of money?
The two figures answer different questions. The profit and loss report records income on the invoice date and costs on the bill date. Your bank balance only shifts on the day a payment clears. The gaps between those two moments are where cash goes missing:
- Customers on 30, 60 or 90-day terms. The work is done, the profit is booked, the money hasn’t arrived.
- Stock and materials bought up front. A retailer stocking up for Christmas pays in October and sells in December.
- GST and PAYG withholding. Tax collected on the ATO’s behalf builds up quietly, then departs in a single quarterly payment.
- Loan principal. Repaying the principal on a loan reduces cash but doesn’t appear as an expense in your profit.
- Equipment purchases. A $60k ute paid for in cash leaves the account at once, even though the tax deduction may be spread over years.
| Profit | Cash flow | |
|---|---|---|
| Measures | Income minus expenses | Money in minus money out |
| Timing | When invoiced or incurred | When paid or received |
| Includes loan principal? | No | Yes |
| GST you’ve collected | Excluded | Counted while it sits in the account |
| Where you see it | Profit and loss statement | Bank statements, cash flow statement |
A worked example: the tradie who was “doing well”
Consider an electrical contractor on the Gold Coast. In the September quarter they invoice $210k and their accountant reports a healthy profit. But two builders pay on 60-day terms, and $95k of those invoices won’t be paid until November. Meanwhile, wages, a van repayment, materials and an October BAS of $18k all fall due.
On paper, the quarter was the best of the year. In the bank, the account dips into overdraft in mid-October. Nothing is wrong with the business; the cash is just arriving six weeks after the costs. That’s a timing gap, and it can be measured. Our cash flow gap calculator helps put a figure on it.
How lenders read your cash flow
Banks tend to start from your financial statements, tax returns and a cash flow forecast. They want to see that normal trading comfortably covers existing and new repayments, a test often called serviceability.
Many non-bank lenders go straight to the source. With your permission they work through the last half-year or full year of transactions on your business account, a method known as bank statement lending. They look at average monthly deposits, how steady those deposits are, which loans you’re already repaying, and whether payments have bounced. A business with lumpy months but a steady overall pattern can still look strong.
Short on cash this month? A quick enquiry can show what options fit before the shortfall becomes urgent.
Ways to smooth cash flow
Before borrowing, the free fixes are worth trying: send the invoice the day the job finishes, give new customers tighter terms, park GST in its own account and ask key suppliers for an extra fortnight. The ATO publishes a free Cash Flow Kit that covers these and other levers.
When the gap is genuine and short-term, finance built for timing problems usually fits best. Invoice finance advances money against unpaid invoices, a business overdraft covers dips as they happen, while a working capital loan suits a stock build-up before a busy season. See also our broader guide to cash flow finance.
Related terms: working capital, cash flow statement, working capital cycle and debtor days.
Is a timing gap squeezing your business?
If the work is there but the money is late, it’s worth finding out what funding could bridge the wait. Filling in our form is a sixty-second job, and sending it doesn’t trigger any credit enquiry. We don’t auction your file to dozens of funders either. Someone here looks over what you’ve told us, then rings you for a proper conversation. Honest figures for turnover, debtors and the shortfall help us land on a workable match the first time round.
Frequently asked questions
What is the difference between cash flow and profit?
Profit is income minus expenses for a period, counted when sales and costs are recorded. Cash flow is what physically moved through the bank account. A business that invoices $80k in June but isn't paid until August shows the profit in June and the cash in August.
What counts as negative cash flow?
Any period in which more money leaves the business than arrives. One negative month is common, especially around a BAS payment or a big stock order. Several negative months in a row, with no clear catch-up coming, is the pattern lenders and accountants worry about.
How do lenders check my cash flow?
Banks usually look at financial statements, tax returns and a forecast. Many non-bank lenders connect to your business bank account and read the deposits, regular outgoings, existing loan repayments and any dishonoured payments over the last six to twelve months.
Can I get a loan if my cash flow is tight?
Often, yes. Lenders expect working businesses to have uneven months. What they look for is steady deposits over time, repayments on existing debts being met, and a believable reason the gap is temporary. Property owners have more options again, because security can offset a thin month.
Does GST affect cash flow?
Yes. GST you collect sits in your account until you pay it on your BAS. If that money is spent in the meantime, the quarterly payment can arrive as a shock. Setting GST aside in a separate account is one of the simplest cash flow habits.