Quick answer
Profit measures whether income exceeds expenses over a period, while cash flow measures when money actually enters and leaves the bank account. A business can be profitable and still run short of cash when customers pay late, stock is bought ahead of sales, tax is due in lumps, loan principal is repaid or growth ties up cash. Timing gaps can be funded; ongoing losses must be fixed.
Key points
- Profit is about whether you make money; cash flow is about when.
- Debtors, stock, tax and growth create timing gaps.
- Loan principal repayments use cash but are not expenses.
- Fund timing gaps; fix profit problems.
“We had our best year ever, so why can’t I pay the BAS?” It is one of the most common questions small business owners ask their accountants, and one of the most important to answer correctly. Profit and cash are related, but they are not the same thing. Understanding the difference explains most cash crunches and tells you whether borrowing will help or hurt.
Two different questions
Profit answers: over this period, did the business earn more than it spent? It is recorded on an accrual basis in most businesses’ accounts: sales are counted when made, expenses when incurred, regardless of when cash moves.
Cash flow answers: right now and in the coming weeks, is there enough money in the bank to pay what is due? It is about timing: when money actually arrives and when it actually leaves.
A business can be strongly profitable over a year and still face a week when the account cannot cover payroll. It can also show a loss in a month and have plenty of cash, for example after collecting a large overdue invoice.
Why profit and cash diverge
Customers pay later than you record the sale. Your profit and loss counts the sale when you invoice. The cash arrives 30, 45 or 60 days later, or later still. Growth widens this gap, because more invoices are outstanding at any time.
Stock is bought before it is sold. Stock purchases use cash immediately, but they only become an expense in your profit and loss when the stock is sold. A big stock order can drain the account without affecting profit at all.
Tax arrives in lumps. GST, PAYG withholding and income tax are collected or accrued gradually but paid quarterly or annually. If the cash is spent in the meantime, the payment can arrive with nothing set aside.
Loan principal is not an expense. When you repay a loan, the interest is an expense but the principal is not. Your profit and loss looks fine, yet the cash leaving the account each month includes the principal.
Assets are expensed slowly. A $60k machine might be depreciated over years in the accounts, but the cash leaves the day you pay for it.
Owners take money out. Drawings and dividends reduce cash but are not business expenses.
Timing problem or profit problem?
This is the key diagnostic question, and getting it right protects you from expensive mistakes.
You have a timing problem if, averaged over a reasonable period, the business brings in more than it spends, including loan repayments, but cash arrives later than costs fall due. Timing problems are common, normal and fixable, either by changing the timing or by funding the gap.
You have a profit problem if, averaged over time, more goes out than comes in. Borrowing will not fix that; it will make it worse, because repayments add to costs. The fix is pricing, costs or volume.
The break-even calculator shows whether current sales cover your costs, and our guide to pricing and margin covers ways to improve profitability.
Got a timing gap in a profitable business? Start a 60-second enquiry. No credit check to enquire.
How to see both clearly
Use two simple tools together:
- Your profit and loss, monthly, to see whether the business is making money.
- A 13-week cash flow forecast, updated weekly, to see when cash will be tight. See our guide to the 13-week cash flow forecast.
If the profit and loss looks healthy but the forecast shows a gap, the issue is timing. If both look weak, address profitability first.
Fixing timing problems
- Collect faster with prompt invoicing, deposits, shorter terms and consistent follow-up.
- Hold less stock by ordering smaller and more often.
- Negotiate supplier terms to align payments with income.
- Set aside tax as you collect it, so lumpy payments are covered.
- Fund what remains with a facility that matches the gap: a line of credit for recurring gaps, a short-term loan for one-off gaps, invoice finance for debtor-driven gaps. See cash flow loans.
Our guide to the working capital cycle shows how to measure exactly how much cash your timing ties up.
Fixing profit problems
- Review prices against current costs; many businesses are slow to pass on rises.
- Cut costs that do not drive revenue, such as unused subscriptions or excess capacity.
- Focus on profitable work and stop doing work that loses money.
- Improve productivity with better scheduling, tools or processes.
- Get advice early if losses are persistent; the Small Business Debt Helpline and your accountant are good starting points.
Growth: the special case
Fast growth creates a particular cash squeeze. Each new sale is profitable, but it ties up cash in stock and debtors before the profit arrives. A business growing quickly may need funding not because anything is wrong but because success is outpacing its cash. Planning for this, rather than reacting to an empty account, is the mark of a well-run growing business. See working capital loans.
What lenders look for
Cash flow lenders look at your bank statements to see whether the business can carry a repayment. They are effectively checking for a timing problem in a viable business. If statements show consistent deposits that cover costs over time, but with gaps between, funding makes sense. If they show steadily falling balances and rising dishonours, the lender may suspect a profit problem, and so should you.
Owner drawings and cash
Many owners pay themselves irregularly, taking money when the account looks healthy. That can turn a manageable timing gap into a crisis, because drawings are taken just before a big BAS or supplier payment. Paying yourself a regular, planned amount, and topping up from profits after tax and obligations are covered, keeps business cash more predictable and makes your forecast more reliable.
A worked illustration
An illustrative signage company made a solid profit last year. Yet it regularly ran short before BAS. Investigation showed three causes: customers paying in 50 days on 30-day terms, a habit of buying vinyl and materials in bulk, and spending GST collected during the quarter. By moving customers to 14-day terms with deposits, ordering materials monthly and setting aside GST from every payment, it closed most of the gap. A small line of credit covered the rest. Its profit had never been the problem; its timing was.
Get the timing right
If your business is profitable but cash is tight, tell us about the gap and its cause. There is no credit check to enquire, your details are not shared with a stack of lenders, and a real person reads your enquiry. Accurate figures help us confirm you have a timing gap and match funding to it. Apply now.
Frequently asked questions
Can a profitable business go broke?
Yes. If cash runs out before customers pay, a profitable business may be unable to pay wages, suppliers or tax on time, which can lead to serious problems.
Why does my profit and loss show a profit but my bank account is empty?
Common reasons are unpaid customer invoices, stock bought but not yet sold, tax payments, loan principal repayments and money taken out by owners.
How do I know if I have a timing problem or a profit problem?
Look at a normal month averaged over time. If income exceeds costs including repayments, the issue is timing. If it does not, the issue is profit.
Should I borrow to fix a profit problem?
No. Borrowing adds repayments to costs that already exceed income. Fix pricing, costs or volume first.
Prefer to do it right here?
The same 60-second enquiry, on this page. No credit check to enquire, and a real person reviews it.