Profit is an accounting concept; cash is what's in your bank. The most common causes of the gap are: unpaid invoices sitting in accounts receivable, GST and tax obligations accruing but not set aside, loan repayments (principal isn't an expense but does reduce cash), and inventory purchases that appear on the balance sheet, not the P&L. A cash flow statement — not just a P&L — is what you need.
What it depends on
The full answer depends on your specific circumstances. Here’s what matters.
Your debtor days
If your average customer takes 45–60 days to pay but your suppliers expect payment in 30 days, you're funding the gap from your own cash. Check your accounts receivable aging report. The ATO's small business benchmarks show the average debtor days by industry — if you're well above average, your credit terms or collection process needs attention.
Tax obligations accruing silently
GST collected on sales, PAYG withholding on wages, and your own income tax liability all accrue in your bank balance but aren't yours to spend. A common mistake: treating total bank balance as available cash. Best practice is a separate bank account for tax obligations — the ATO recommends setting aside approximately 25–30% of income for sole traders.
Loan principal repayments
Only the interest component of loan repayments appears as an expense on your P&L. The principal repayment reduces your bank balance but doesn't reduce your profit. If you have significant debt, this gap between profit and cash can be substantial — and it's the most commonly misunderstood item in small business finance.
Inventory and work in progress
If you buy stock or materials, the purchase goes to the balance sheet as inventory — not to the P&L until you sell it. So your cash goes down (you paid for the stock) but your profit doesn't change until a sale occurs. Overstocking directly reduces cash without affecting reported profit.
The last 10%
What a qualified professional can add
The answer above covers the general position. Here’s where professional judgement — applied to YOUR specific situation — makes the difference.
- Preparing a proper cash flow statement that reconciles your profit to your bank balance — showing exactly where the cash went
- Setting up a cash flow forecast so you can see problems coming 4–8 weeks before they hit your bank account
- Establishing a system of separate accounts for tax, operating costs, and profit — so your available cash is always visible
- Identifying whether the cash gap is temporary (seasonal, one-off) or structural (your business model has a permanent cash timing issue)
Questions to ask before you engage one
If you decide to engage a professional, these questions help you evaluate whether they’re right for your situation.
Can you show me a cash flow statement — not a P&L — that explains where my profit went?
What are my average debtor days, and how does that compare to my industry benchmark?
How much of my current bank balance is committed to tax obligations I haven't paid yet?
Do you prepare a rolling cash flow forecast, or only backward-looking reports?
What is the simplest change I can make right now to improve my cash position in the next 30 days?
General Advice Warning
The information on this page is general in nature and does not take into account your personal objectives, financial situation or needs. It is provided by Global Mutual Funds Pty Ltd (ABN 20 090 555 436, AFSL 222640) and should not be relied upon as a substitute for professional advice. Consider whether the information is appropriate before acting on it. Read our Financial Services Guide.