Why a profitable business can still run out of cash
This is one of the most common, and most misunderstood, areas in business.
On paper, a business can be profitable, with healthy margins. But in reality, you may still find yourself under pressure when it comes to paying suppliers, wages, or tax obligations.
That’s because profit and cashflow measure two very different things. Understanding the difference is critical if you want to stay in control.
What is profit?
Profit is what’s left after you subtract expenses from revenue. It tells you whether your business is commercially viable.
However, profit is based on accounting principles – not actual cash movement.
It doesn’t tell you:
- When money is actually received
- When expenses are paid
- Whether cash is available in the bank when you need it
What is cashflow?
Cashflow is the movement of money in and out of your business.
It reflects:
- Cash coming in (customer payments)
- Cash going out (suppliers, wages, tax)
Cashflow is what determines whether you can meet your day-to-day obligations.
You can’t pay wages with profit on a report – you need cash in the bank.
That’s why strong cashflow management is just as important as profitability, particularly as your business grows.
Why the gap happens
This is where many businesses get caught out.
Profit is often recognised before cash is received, which creates a timing gap.
Construction example
You complete a project and issue an invoice for $100,000.
- The income is recognised, so your business shows a profit
- But the payment may take 30–60 days
In the meantime, you still need to pay:
- Staff wages
- Suppliers
- Superannuation and tax obligations
Even though the job was profitable, your cash position may feel tight.
Professional services example
You’re profitable on paper, but:
- Clients pay late
- Work in progress isn’t invoiced promptly
This creates a backlog of earned revenue that hasn’t yet turned into cash.
The result?
You’re doing the work, generating profit – but not seeing the cash when you need it.
What to watch for
These are some of the early warning signs that cashflow may be becoming an issue:
- Struggling to pay bills despite strong revenue
- Relying on credit or overdrafts to manage short-term needs
- Large gaps between invoicing and receiving payment
These signals are often overlooked – but they’re a sign that your business may need better visibility and planning around cashflow.
How to manage both
1. Monitor cashflow regularly
Don’t rely on annual reports.
To stay in control, you need:
- Regular visibility (weekly or monthly)
- A clear understanding of what’s coming in and going out
- Forward-looking cashflow forecasts
This allows you to anticipate pressure points before they become problems.
2. Improve payment terms
Small changes here can have a big impact.
- Invoice as soon as work is completed
- Follow up consistently on outstanding payments
- Consider shorter or staged payment terms where appropriate
The faster you convert work into cash, the stronger your position will be.
3. Plan ahead
Cashflow forecasting is one of the most valuable tools a business can use.
It helps you:
- Identify potential shortfalls early
- Understand timing gaps between income and expenses
- Make informed decisions before issues arise
Instead of reacting to problems, you can plan for them — and avoid them altogether.
How we can help
At Business Plus Numbers, this is a core part of how we support our clients. Through management reporting and CFO advisory, we provide clear visibility over cashflow and help businesses make proactive, confident financial decisions.
With regular financial reviews and proactive advice, we help you make informed decisions to stay focused on achieving your business goals.
Includes:
- Monthly management reporting
- Cashflow forecasting and budgeting
- KPI tracking and performance dashboards
- Virtual CFO and strategic business advisory
Final thought
Profit tells you if your business is working.
Cashflow tells you if your business can survive.
You need both – but if you ignore cashflow, profit alone won’t protect you.
If you’re unsure how your cashflow is tracking – or want clearer visibility across your business – business plus numbers can help you build the reporting and forecasting tools to stay in control.
