Your Business Is Probably Profitable and Broke at the Same Time. Here's Why.
Why Profit Doesn't Equal Cash in the Bank
Where the Gap Actually Comes From
Money tied up in unpaid invoices. You've recognised the revenue and it counts toward profit, but the customer hasn't actually paid yet. A business with slow-paying customers can look highly profitable on paper while genuinely struggling to cover payroll.
Inventory sitting on shelves. Cash spent buying stock doesn't show up as an expense until that stock is sold — meaning a big inventory purchase can drain your bank account without touching your profit figure at all in the same period.
Loan principal repayments. Only the interest portion of a loan repayment is an expense on your P&L. The principal repayment is a real cash outflow every month that never appears as a cost reducing your reported profit.
Tax and GST timing. You've collected GST from customers throughout the quarter, and it sits in your bank account looking like available cash — until the BAS is due and a chunk of that "cash" was never actually yours to spend.
Growth itself. A growing business often needs to spend cash upfront — more stock, more staff, more equipment — well before the resulting revenue and profit show up. Growth is frequently cash-negative even while it's profit-positive.
What This Actually Means for You
None of this means your profit figure is wrong or misleading in some dishonest sense — it's doing exactly what it's designed to do. It just means profit alone was never designed to tell you whether you can make payroll next month. That's what a cash flow forecast is for, and it's a completely different exercise from your P&L.
The Fix Isn't Complicated, But It Requires Looking at the Right Number
If you're only reviewing your P&L each quarter and not a rolling cash flow forecast, you're looking at the wrong document to answer "can we actually afford this." Both numbers matter — they just answer different questions.
RBizz builds cash flow forecasting alongside your compliance work, so you're never caught off guard by the gap between profit and what's actually in the bank. Get in touch if you've ever been surprised by your bank balance despite a good year on paper.
