Making a profit. Still short on cash?

The month has gone well. Sales are up, your accountant says the business made a profit, and then payroll arrives. You move money between accounts and wonder whether the report belongs to somebody else.

This can happen without an error in the accounts. Profit measures the result of your trading over a period. Cash measures the money available to meet payments. The gap between them deserves its own explanation.

A useful monthly review follows that gap all the way to the bank. Once you can see where the money went, the next decision usually becomes clearer.

A sale has several dates

Consider a consulting job completed in August, invoiced at month end and paid in October. Under accrual accounting, the revenue may belong in August even though the customer has not yet paid. Your employees and subcontractors may need paying much sooner.

The invoice becomes a receivable: an amount owed to the business. It supports the profit figure, but it cannot pay your rent while it remains unpaid. Cash-basis reports use different timing, so first check which basis you are reading. The Australian Government’s profit and loss guidance explains the purpose of the report and provides a starting template.

The same timing issue can run in the other direction. A customer may pay a deposit before you have earned the income. The bank account improves immediately, but some of that money still has work attached to it.

Follow one profitable month

This fictional example concerns a small wholesaler. Figures exclude GST to keep the illustration readable, and assume no other tax, financing or balance-sheet movements.

How $18,000 profit can become a $4,000 cash reduction

Movement during the month	Cash effect
Accounting profit	$18,000
Add back depreciation, which has no current cash payment	+$2,000
Increase in customer invoices still unpaid	−$15,000
Increase in stock held	−$7,000
Increase in supplier bills not yet paid	+$4,000
Loan principal repaid	−$3,000
Cash paid for new equipment	−$3,000
Net change in cash	−$4,000

The business traded profitably. Its customers paid more slowly, it stocked up, and it made payments that were not all expenses in that month’s profit report. There is no missing $22,000. There are several different uses of money.

The supplier movement temporarily helps cash because some purchases remain unpaid. That is a timing benefit with a future payment attached, not spare income.

Where the squeeze usually hides

Start with debtors. Compare the amount outstanding with recent sales, then inspect the oldest and largest balances. A higher receivables balance can be expected during growth. It becomes more concerning when collection times also lengthen or particular invoices are disputed.

Next, look at stock and work in progress. Buying in bulk may improve the unit price while tying up money for months. Unbilled work creates a similar problem in service businesses: people have done the work, wages have been paid, but the next invoice is waiting for an approval or milestone.

Loan repayments need separating into principal and interest. Interest is generally an expense; repaying principal reduces the debt. Both use cash, although they appear differently in the accounts. Equipment purchases also need their own line in a cash forecast rather than being inferred from depreciation.

Finally, review owner payments and tax balances. Drawings, dividends, salaries and loans to owners have different accounting and tax consequences. Avoid grouping them all under a casual label such as “money taken out”. Your accountant should help establish what each payment actually represents.

Growth can make the gap larger

A new contract can require more labour and materials before the first customer payment arrives. If every additional dollar of sales needs upfront funding, rapid growth can increase the cash shortage even while reported profit rises.

Before taking on the next large job, map the payment sequence. When will you buy supplies? When will wages leave the bank? What must happen before you can invoice? Could deposits or progress claims, where commercially appropriate, bring cash closer to the work?

That conversation is more useful than simply asking whether the contract has a good margin. You need to know both whether the job earns enough and whether the business can carry it.

A smaller report, with a better answer

Ask for a monthly bridge from profit to the movement in cash, alongside an aged receivables report and a short cash forecast. Keep the bridge consistent each month so unusual movements stand out. Investigate large unexplained balances before deciding that the answer is another loan.

For the weeks ahead, build the forecast around actual receipt and payment dates. The business.gov.au cash flow template is a useful starting point; identify estimates and make the GST treatment explicit.

The next time profit and the bank balance seem to disagree, bring both to the same conversation. A clear explanation of the difference gives you something practical to change: an invoice, a stock order, a payment timetable or the pace of growth.