One of the biggest misconceptions in business is that if you’re making a profit, everything must be going well.
Unfortunately, that’s not always the case.
Every year, we see profitable businesses struggle to pay suppliers, meet payroll or cover their tax obligations. On paper, they’re doing well. In reality, they’re running out of cash.
Understanding the difference between profit and cash flow is one of the most important financial skills a business owner can develop.
Profit and Cash Flow Aren’t the Same Thing
Although they’re closely related, profit and cash flow measure two very different things.
Profit is what’s left after you’ve deducted your business expenses from your income.
Cash flow is the actual money moving in and out of your bank account.
You can be profitable but still have very little cash available to pay your bills.
Likewise, you can have plenty of cash in the bank but still be making a loss.
Understanding both is essential for making informed business decisions.
A Simple Example
Imagine your business completes a $50,000 job in August.
You issue the invoice immediately, so the income appears in your accounts and contributes to your profit.
The problem?
Your client doesn’t pay for another 60 days.
In the meantime, you’ve already paid for:
- Staff wages
- Materials
- Fuel
- Rent
- Insurance
- Superannuation
- GST
On paper, your business has made a healthy profit.
In reality, you’re using your own cash to fund the project while waiting to be paid.
This is one of the most common cash flow challenges faced by growing businesses.
Growth Can Put Pressure on Cash Flow
Many business owners assume that growing sales automatically solve financial problems.
Often, the opposite is true.
As your business grows, so do your expenses.
You may need to:
- Purchase more stock
- Employ additional staff
- Invest in equipment
- Increase marketing
- Buy extra vehicles
- Move into larger premises
These costs are often paid before you receive payment from your customers.
Without careful planning, rapid growth can actually create cash flow stress.
Why Businesses Run Out of Cash
Poor cash flow rarely happens because of one large mistake.
It’s usually the result of several small issues building over time.
Some common causes include:
Slow Paying Customers
When invoices remain unpaid for weeks or months, cash stops flowing into the business.
Following up outstanding accounts promptly can make a significant difference.
Pricing That Doesn’t Reflect Costs
Many businesses haven’t reviewed their pricing for years.
As wages, insurance, fuel and supplier costs increase, profit margins shrink.
Regular pricing reviews help ensure your business remains profitable.
Carrying Too Much Stock
Stock sitting on shelves represents money that can’t be used elsewhere.
Holding excessive inventory ties up valuable cash.
Reviewing purchasing habits can often free up working capital.
Unexpected Tax Bills
One of the biggest cash flow surprises for business owners is tax.
Without setting money aside throughout the year, BAS, PAYG instalments and income tax can place enormous pressure on cash reserves.
Planning ahead helps avoid these surprises.
Your Bank Balance Doesn’t Tell the Whole Story
Many business owners judge the health of their business by looking at their bank account.
While it’s an important number, it doesn’t provide the full picture.
Your bank balance doesn’t show:
- Outstanding customer invoices
- Bills that haven’t yet been paid
- Upcoming payroll
- GST liabilities
- Superannuation obligations
- Future tax payments
This is why relying solely on your bank balance can lead to poor decisions.
Good financial reporting provides a much clearer understanding of where your business stands.
Practical Ways to Improve Cash Flow
The good news is that small improvements can make a big difference over time.
Here are a few practical strategies.
Invoice Promptly
The sooner an invoice is sent, the sooner it can be paid.
Delays in invoicing often create unnecessary delays in receiving payment.
Follow Up Outstanding Accounts
Don’t be afraid to politely remind customers when invoices become overdue.
A structured debtor follow-up process can significantly improve cash flow.
Review Your Pricing
Costs increase every year.
Regularly reviewing your pricing helps protect your profit margins and ensures your business remains sustainable.
Build a Cash Reserve
Setting aside funds during stronger months provides a buffer when business slows or unexpected expenses arise.
Even a modest reserve can reduce financial stress.
Forecast Ahead
Cash flow forecasting allows you to identify potential shortages before they become serious.
Knowing what’s coming gives you time to make informed decisions.
Cash Flow Gives You Choices
Strong cash flow doesn’t just help you pay the bills.
It gives you flexibility.
Businesses with healthy cash flow are better positioned to:
- Invest in new equipment
- Hire quality staff
- Take advantage of opportunities
- Weather slower periods
- Sleep better at night
Cash flow provides confidence because you’re making decisions from a position of strength rather than reacting to financial pressure.
Don’t Wait Until There’s a Problem
One of the biggest mistakes business owners make is only looking at their numbers when something goes wrong.
By then, opportunities to improve cash flow may have already been missed.
Reviewing your financial performance regularly allows you to identify trends, spot issues early and make proactive decisions.
A simple monthly review can often highlight opportunities to improve profitability, reduce unnecessary spending and strengthen your cash position.
How We Can Help
At PLH Accountants, we work with business owners throughout the year, not just at tax time.
We help clients understand their numbers, improve cash flow, plan ahead and make informed financial decisions that support long-term growth.
Whether you’re experiencing cash flow challenges or simply want a clearer picture of your business, we’re here to help.
If you’d like to better understand your business finances, contact our team today. Together, we can help you build a stronger, more resilient business.