Quick answer
A profitable business runs out of cash because profit counts sales when you invoice them, while cash only counts when money lands. Stock, unpaid invoices, GST and tax set-asides, loan principal, equipment and owner drawings all use cash without appearing as costs in the profit and loss. Growth makes it worse, because every new sale needs funding before it pays you back.
Key points
- Profit is an accounting result; cash is a timing result, and the two only meet over a long period
- Loan principal, equipment purchases and owner drawings drain cash but never appear as expenses in the profit and loss
- Growth consumes cash because stock and wages are paid before the customer pays you
- GST, PAYG withholding and super sitting in your account are not yours to spend
- A 13-week cash forecast shows the squeeze weeks before the profit and loss does
The accountant says you made $41k in the quarter. The bank says you have $6k and a payroll on Friday. Both are telling the truth, and that is what makes it so disorienting.
Nothing is wrong with the arithmetic. Profit and cash answer two different questions, and a business can score well on one while failing the other. Once you can see where the two come apart, you can usually predict a squeeze weeks ahead.
Why can profit and cash tell different stories?
Most small businesses report on an accrual basis. A sale counts when you invoice it. A cost counts when you incur it. That is the right way to judge whether the business is working. But the bank only registers movement, and there are several things that move money without touching profit.
| Where cash goes | Shows in profit? | Typical effect |
|---|---|---|
| Customers who haven’t paid yet | Yes, as revenue | Profit rises, cash doesn’t |
| Stock bought ahead of sales | No, until it sells | Cash gone, profit unchanged |
| Loan principal repayments | No, only the interest | Cash falls every month |
| Equipment and vehicle purchases | Only as depreciation | Large one-off outflow |
| Owner drawings and dividends | No | Cash falls, profit doesn’t |
| GST, PAYG and super held in your account | No | Balance looks higher than it is |
| Tax paid on last year’s profit | No (it’s last year’s) | A bill arrives with no income against it |
Read down that list and you can see why the gap widens in good years. A strong year makes the receivables bigger, the stock larger, the tax bill heavier and the drawings more tempting.
How does growth drain cash?
Growth is the cleanest way to run out of money while winning. Every extra sale arrives in a particular order: buy the inputs, do the work, pay the people, invoice, wait, get paid. You fund that whole chain before the cash returns.
Take a Perth commercial cleaning company. It lands a contract worth $18k a month and has to hire two cleaners and buy equipment before day one. Wages and supplies cost $13k in month one. The client pays on 45-day terms. The first payment arrives in week eight, and by then the owner has paid out roughly $22k across two months with nothing in return. The contract is profitable from the first invoice. It is cash-negative for nearly two months.
This is the working capital cycle: the time between paying out and getting paid. If it stretches, the business needs more funding to carry the same revenue. The glossary has a short entry on the working capital cycle, and the same idea sits behind debtor days, which measure how long customers take.
What does the squeeze look like month by month?
Here is an invented but typical pattern for a trade supplier with $85k of monthly sales and a 20 per cent gross margin. It is not a prediction; it shows the direction of travel.
| Month 1 | Month 2 | Month 3 | Month 4 | |
|---|---|---|---|---|
| Sales invoiced | $85k | $95k | $108k | $120k |
| Cash received from customers | $70k | $82k | $92k | $103k |
| Profit for the month (after all costs) | $6k | $7k | $9k | $10k |
| Increase in stock and receivables | $9k | $11k | $14k | $15k |
| Loan principal and drawings | $5k | $5k | $5k | $5k |
| Change in cash | -$8k | -$9k | -$10k | -$10k |
Profit rises every month. Cash falls every month. By month four the business has burned roughly $37k while reporting $32k of profit. No single month looks alarming in the accounts; the damage is entirely in the lines the profit and loss does not show.
What are the early warning signs?
You can see this coming long before the overdraft limit does.
- Receivables growing faster than sales. If sales rose 10 per cent and unpaid invoices rose 25, customers are stretching.
- Debtor days drifting up. Track the number monthly; a creep from 32 to 41 days is a signal.
- Stock building up. More cash in the shed is less cash in the bank.
- Paying suppliers with a delay. If you routinely pay on day 40 against 30-day terms, you are already borrowing from them.
- A balance that looks fine only because GST and PAYG are in it. Net those off and see what remains.
- Cash sweeps getting smaller. If transfers to the tax account are skipped, it is a sign.
The most reliable early warning is a rolling 13-week cash flow forecast. It shows the low point weeks ahead, when there is still time to chase an invoice or arrange an overdraft. The cash flow ratios guide covers the numbers worth tracking every month.
How do you fix it without borrowing?
Borrowing is not the first lever. Shorten the cycle first.
- Collect sooner. Invoice the same day, ask for deposits and stage payments. Our guide on getting customers to pay faster covers the mechanics.
- Carry less stock. Slow-moving lines are cash sitting on a shelf. Review the bottom third of your inventory.
- Stretch supplier terms, within reason. Asking for 30 days where you have 14 is a fair conversation. See negotiating better supplier terms.
- Set aside tax and GST at source. Move it the day it arrives.
- Plan drawings against cash, not profit. Pay yourself from what the business can fund.
- Check pricing. If the margin does not cover the cost of waiting for payment, price is part of the problem.
When does finance make sense?
Banks are often the cheapest source of working capital, and a business with a clean history and security can do well with a bank line. When the bank fits, take it seriously. If it has declined you or moved slowly, other options exist.
Finance suits a gap that is temporary and tied to something that will pay it back: a big contract, a seasonal peak, a customer who is slow but reliable. Invoice finance turns unpaid invoices into cash early. A business line of credit gives you a limit that you draw on only when needed. A term loan suits a one-off need with a known end. Run your numbers through the cash flow gap calculator to see how big the hole is before choosing.
It suits a structural loss much less. If the business spends more than it earns after you account for everything, lending delays the question and adds repayments. In that case the first step is the model: price, costs or volume. Our guide on fixing a cash flow problem fast works through both situations.
What mistakes make it worse?
- Judging health by the profit and loss alone. Look at the cash flow statement too.
- Celebrating a big sale before it’s paid. Treat it as cash at the point it clears.
- Funding growth from the tax account. It works for a quarter, then the bill arrives.
- Taking drawings in line with profit. Profit is not spendable until it is cash.
- Ignoring the first sign. One late-month dip is a data point; three in a row is a pattern.
- Borrowing without a repayment source. Know where the money comes from before you take it.
If you can see the shape of your own gap in this guide, the useful question is how large it is and what is the cheapest way to cover it. A short enquiry is one way to find out.
Profit looks good, cash does not: what now?
Plenty of capable owners hit this wall, and it is a long way from a sign of failure. Often it means the business grew faster than its funding.
We can look at your numbers and say plainly whether finance makes sense and what kind. Asking takes a minute or so, and it does not touch your credit file. We do not scatter your details across a list of lenders, which is why only one call follows. A member of the team reads what you send before they ring you. Tell us the real turnover, what is owed to you and what is due out, and the first option we raise will be much more likely to be the right one.
Frequently asked questions
How can a business be profitable and still go broke?
Because profit is recorded when you earn revenue, not when you receive payment. If you pay suppliers and wages in 14 days but customers pay in 45, the business can show a profit every month while the bank balance sinks. When the gap is larger than your buffer, bills go unpaid despite healthy accounts.
What is the difference between profit and cash flow?
Profit is revenue less expenses for a period. Cash flow is the movement of actual money in and out of the bank. Things like paying off loan principal, buying equipment, building stock and taking drawings reduce cash without being expenses, while unpaid invoices raise profit without adding cash.
Does fast growth cause cash problems?
Often, yes. Each extra job needs materials, wages and sometimes a deposit on stock before the customer pays. A business that doubles sales may need to fund a much bigger gap between paying out and getting paid. Many growing businesses find the squeeze comes just after their best month.
How do I check whether my business has this problem?
Compare net profit with the change in your bank balance over the same period. If profit is positive and cash fell, find the difference: look at receivables, stock, loan repayments, equipment purchases, GST and tax. Our cash flow ratios guide and debtor days measure help track it.
What is a working capital cycle?
It is the time between paying for inputs and receiving payment from customers. A longer cycle means more cash is tied up and more funding is needed. Shortening it, through faster collection, tighter stock or longer supplier terms, frees cash without borrowing.
Should I borrow if profit is fine but cash is tight?
Sometimes. If the gap is temporary or tied to growth with a clear repayment source, short-term finance such as invoice finance or a line of credit can work well. If the gap is permanent because the business loses money or prices too low, borrowing postpones the problem and adds repayments.