Many business owners are puzzled when their accountant tells them they’ve made a profit, but their bank account tells a different story. If you’ve ever asked, “Where did the money go?”, you’re not alone.
The answer lies in the key difference between profit and cash flow.
Profit: The Accounting View
Profit is what remains after you subtract all expenses from your income over a period, as shown on your profit and loss (P&L) statement. It reflects your business performance—how well you’re selling products or services versus what it costs to run your operations.
But it doesn’t tell you how much cash you actually have.
For example, if you issue a $10,000 invoice in June and don’t get paid until August, that income still shows up in June’s profit—even though no money hit your account yet. Likewise, you might buy inventory or incur costs in one month that affect cash but won’t show as expenses until you sell the stock.
Cash Flow: The Real-Time Money Story
Cash flow tracks the actual inflows and outflows of money—when cash comes in and when it leaves. Even a profitable business can run into trouble if it doesn’t have enough cash to meet obligations like wages, bills, or loan repayments.
One key reason for this is that some major cash outgoings don’t appear on the P&L:
- Loan repayments: Only the interest portion shows on the P&L; the principal is a balance sheet item but still uses cash.
- Tax payments: Income tax on profits, as well as GST and PAYG withholding tax, are liabilities and not included as an expense on your P&L.
- Asset purchases: Buying a vehicle or equipment outright doesn’t show up as an expense immediately—it’s capitalised and depreciated over time.
These outflows can significantly affect your cash, even if your P&L looks healthy.
Managing the Gap
- Use cash flow forecasts to plan ahead
- Follow up on debtors and invoice promptly
- Negotiate supplier terms where possible
- Monitor tax and loan commitments monthly
Final Thought
Profit shows if your business is viable. Cash flow shows whether it can survive. Understand both, and you’ll have a much stronger handle on your financial health – your advisor is always available to help you understand the differences.
