Key Takeaways
- Profit and cash flow are different; profit is what you make on paper, cash flow is what’s in the bank.
- Many SME and trade businesses are profitable but still run out of cash due to timing issues, unpaid invoices or overspending.
- Cash flow problems often stem from growth, poor planning, or irregular payment cycles.
- Monitoring your cash flow regularly helps you avoid being blindsided, even when profits look good.
- Simple strategies like forecasting, better payment terms, and reducing unnecessary spending can improve cash position.
Have you ever looked at your profit and loss statement and thought, “We’re making money,” but then checked your bank account and panicked? You’re not alone. Many tradies and small business owners find themselves in this exact situation.
Your business is technically profitable, but you’re still struggling to pay wages, cover bills or invest in growth. So, what gives? The answer lies in understanding the critical difference between profit and cash flow, and how to manage both effectively.
What’s the Difference Between Profit and Cash Flow?
Let’s start with the basics. Profit is what’s left after all your income and expenses are accounted for. It’s what your accountant shows you at the end of the quarter or year.
Cash flow, on the other hand, is the actual movement of money in and out of your business bank account. It includes things that may not appear on your profit and loss statement right away; like GST, loan repayments, equipment purchases, or slow-paying clients.
In short: profit is an accounting figure, while cash flow is your day-to-day financial reality.
Why Are You Cash Poor Despite Being Profitable?
There are several reasons why profitable businesses can find themselves short on cash:
- Unpaid invoices: If customers are slow to pay, your cash inflow gets delayed even if you’ve already earned the income.
- Overheads: Expenses like rent, wages, and supplier bills need to be paid on time, regardless of when revenue comes in.
- Growth pressure: As you grow, you may take on more staff, buy more tools or vehicles, or carry more materials—often before cash from new jobs starts flowing in.
- Equipment and loan repayments: These are cash outflows that don’t show on the profit and loss in the same way and can eat into available funds fast.
- Tax and GST: Even profitable businesses can be caught short if they forget to set aside funds for tax and BAS obligations.
Why Cash Flow Is More Critical Than Profit for Survival
Your business can survive a lack of profit for a while, but it can’t survive without cash. You still need to pay your team, buy supplies, and cover overheads. If the money isn’t there when needed, you risk bounced payments, poor supplier relationships, or being unable to take on new jobs.
This is why many business advisors say: “Cash is king.” It’s your lifeblood and the true measure of whether your business is healthy.
How to Improve Your Cash Flow
1. Track It Separately
Don’t rely solely on profit reports to gauge business health. Use cash flow statements or software like Xero, MYOB, or QuickBooks to view real-time cash position and upcoming commitments. A cash flow forecast helps you spot issues before they happen.
2. Get Paid Faster
Many businesses wait too long to chase payments. Improve your cash position by:
- Invoicing promptly after work is completed
- Shortening payment terms to 7 or 14 days
- Following up overdue invoices immediately
- Using software to automate reminders
- Requesting upfront deposits for larger jobs
3. Watch Your Spending
Profitable months often trigger spending sprees. While investing in your business is important, don’t commit to new expenses, vehicles, tools, or team members, without checking your forecasted cash flow. Ask: “Can I still cover costs if income dips next month?”
4. Create a Buffer
Set aside a percentage of income each month into a separate savings account. Aim for at least 1 to 3 months’ worth of expenses. This buffer will help cover dry spells or unexpected bills without causing panic.
5. Separate Tax and GST Funds
Keep a separate account for tax and GST so you’re not tempted to spend it. This is a simple move that can prevent nasty surprises at BAS or EOFY time.
Growth Can Make Cash Flow Worse Before It Gets Better
Here’s the catch: business growth often makes cash flow worse before it improves. You might hire new staff, buy more materials, or take on larger jobs that don’t pay for 30 or 60 days. This creates a funding gap where you’re working more but cash is tighter.
This is where good planning, a reliable forecast and access to short-term funding (like a business overdraft or invoice finance) can help smooth the transition.
Final Thoughts
Being profitable feels great, but it’s not the full picture. If you don’t have cash in the bank when you need it, your business risks stalling or even failing despite solid numbers on paper.
The solution isn’t to work harder or take on more jobs. It’s to understand the difference between profit and cash flow, track both regularly, and put systems in place to improve how money flows through your business.
Whether you’re a growing trade business or a seasoned SME owner, mastering cash flow will give you more confidence, less stress, and greater freedom to make the right decisions for your business.
The team at Toyne are here to help you every step of the way. Contact us today.
