Seeing a healthy profit on the monthly report and then opening a nearly empty bank account can feel like the numbers are contradicting each other. They are not. Profit shows whether the business earned enough to cover its costs over a period, while cash flow shows when money actually entered and left the bank.
This is a common issue discussed with accountants in Sydney, particularly by businesses that invoice customers, hold stock or are growing quickly. The business may be performing well on paper but still struggle to cover wages, suppliers or tax payments when they fall due.
The sale may be recorded before the customer pays
A business using accrual accounting usually records a sale when the work is completed or the invoice is issued. If a $20,000 invoice is included in this month’s profit but the customer has 30 days to pay, that money may not reach the bank until the following month.
The gap becomes a problem when several customers pay late while wages, rent and supplier bills continue as normal. The profit and loss statement still shows the sales, but the bank account has not received the cash.
Looking at the aged receivables report helps show which invoices are outstanding and how long they have been overdue. It may also reveal that one large customer is responsible for a sizeable part of the cash shortage.
Tax
A busy sales month can put plenty of cash into the bank, but not all of it belongs to the business. GST collected from customers may need to be paid through the next business activity statement. PAYG withholding, employee super and income tax also need to be allowed for.
Problems often appear when these amounts are treated as spare cash and used for other bills. Keeping tax money in a separate account makes the true available balance much clearer.
Growth usually needs reinvestment
A growing business may need to buy stock, hire staff, move into a larger space or purchase equipment before the extra revenue arrives. Those decisions may support higher profits later, but they create immediate pressure on the bank account.
Stock is a common example. Money leaves the account when products are purchased, then remains tied up until those products are sold and the customers pay. A warehouse full of stock may be valuable, but it cannot cover Friday’s payroll.
Loan repayments
The full loan repayment comes out of the bank, but only the interest portion normally appears as an expense in the profit and loss statement. The principal reduces the loan balance instead. This means a business can report a profit while making large repayments that reduce its available cash each month.
The same timing difference can occur when equipment is purchased. Cash may leave the bank immediately, while the cost appears in the accounts gradually through depreciation.
Use a forecast instead of watching the bank balance
A bank balance only shows what is available today. A cash flow forecast looks ahead and includes the expected dates of customer payments, wages, supplier bills, loan repayments, BAS obligations and other costs.
Update the forecast using real payment behaviour rather than assuming every customer will pay on the due date. It is also useful to compare the forecast with what actually happened each month. If the same gap keeps appearing, the business may need to change its payment terms, request deposits, reduce excess stock or build a larger cash reserve.