It seems contradictory, but a genuinely profitable business can still run out of cash — and it’s one of the most common reasons small businesses get into financial trouble. However, once you understand why profit and cash flow aren’t the same thing, it becomes much easier to manage the gap between them.
Profit is calculated based on income earned and expenses incurred during a period, regardless of when the actual money changes hands. Consequently, a business can show a healthy profit on paper while genuinely struggling to pay bills, simply because invoices haven’t been paid yet or money is tied up in stock.
Slow-paying customers. Extended payment terms or clients who pay late can leave a profitable business short on cash even while revenue looks strong.
Too much money tied up in stock. Inventory sitting on shelves represents cash that isn’t available for other obligations, even though it will eventually convert to sales.
Seasonal fluctuations. Businesses with uneven income throughout the year need to plan for lean periods, rather than assuming average monthly figures apply consistently.
Rapid growth. Growing quickly often means spending on stock, staff, or equipment well before the resulting revenue arrives, which can strain cash flow even during a genuinely successful period.
Underestimating tax and super obligations. Setting aside too little for BAS, income tax, and superannuation can leave a business short when these payments come due.
Forecast cash flow, not just profit. A simple rolling cash flow forecast — tracking expected cash in and out over the coming weeks and months — gives far more warning than relying on a profit and loss statement alone.
Tighten up invoicing and collections. Invoicing promptly, setting clear payment terms, and following up on overdue accounts consistently can significantly improve cash position.
Negotiate supplier terms. Where possible, aligning payment terms to suppliers with when your own customers typically pay reduces the strain of timing mismatches.
Set aside tax and super as you go. Rather than treating every dollar received as available to spend, setting aside a portion for known upcoming obligations avoids being caught short.
Build a cash buffer. Where possible, maintaining a reserve for slower periods or unexpected costs provides breathing room that a purely profit-focused view doesn’t account for.
Cash flow issues rarely appear suddenly — they usually build gradually and become visible only once they’re already a genuine problem. Therefore, reviewing cash flow regularly, rather than only when something feels tight, catches issues early enough to address them calmly.
EBATS helps business owners build realistic cash flow forecasts, plan for tax and super obligations, and avoid the gap between profit on paper and cash in the bank.
📍 Suite 2.2/47 Queen St, Campbelltown NSW 2560, Australia 📞 0404 471 816 🌐 www.ebats.com.au 📧 [email protected]
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