Profitable but broke: profit vs cash explained

Two different questions, two different answers

Your profit and loss answers one question: did the work you did this period create more value than it cost? It records income when you invoice and expenses when they're incurred. Your bank account answers a blunter question: can you pay people this week? Both matter. They just don't always agree.

Neither number beats the other. Profit tells you whether the business model works. Cash tells you whether you'll survive long enough to enjoy it. Plenty of businesses were profitable on paper the month they closed their doors. It runs the other way too: a business can look cash rich for months while quietly trading at a loss, coasting on customer deposits it'll eventually have to work off.

The five usual suspects behind the gap

• Debtors: you booked the income the moment you invoiced, but the customer hasn't paid yet. Growing sales usually means growing debtors, and that swallows cash right when things feel busiest.
• Stock: every dollar sitting on the shelf is a dollar of cash turned into product. It only becomes cash again when it sells, and only becomes an expense once it does.
• Loan principal: repaying borrowed money reduces your bank balance but never touches the profit and loss. Only the interest portion counts as an expense.
• Equipment and assets: a $40,000 vehicle might hit profit as depreciation spread over years, but the cash can leave your account in a single day.
• Tax and GST: GST you collect was never your money to begin with, and income tax on profit falls due regardless of whether customers have actually paid you. Both drain the bank without touching reported profit.

A worked example

Take an example wholesale business having what looks like a strong quarter. The figures below are illustrative.

The owner sees a $50,000 profit and feels good about it, reasonably enough. Meanwhile the bank balance dropped $55,000 over the same quarter. Nothing dishonest is going on here: $60,000 of those sales are still sitting in debtors, the business stocked up ahead of next quarter, and the loan repayment left as it always does. But spend as though that profit is cash in hand and trouble arrives fast.

How to keep both numbers in view

The fix isn't picking a favourite number, it's looking at both side by side every month. A simple monthly pack should show profit, the movement in debtors, the movement in stock, loan repayments and upcoming tax, so you can see exactly where this month's profit actually went. Once you've watched that reconciliation play out a few times, the profitable but broke feeling stops being a mystery: you can point straight at the line responsible. Most accounting platforms can also produce a formal cash flow statement if you'd rather see the same reconciliation as a standard report.

It changes behaviour too. Owners who watch the debtor movement line start chasing overdue invoices sooner. Owners who watch stock levels stop over ordering. The reporting is the easy part; the habits it builds are the actual payoff.

Seeing your own gap clearly

NextEra's monthly management reports show profit and cash movement side by side, with the drivers of any difference spelled out in plain language rather than accounting jargon. If your profit figure and your bank balance have been telling you two different stories lately, a Strategic Finance Review can trace exactly where the cash is going.