The gap between profit and cash is more common than you think, and knowing this can completely change the game for you. Profit tells one story – how well your business is performing. Cash tells another – whether your business can stay afloat. Believe it or not, you can be raking in profit while your bank account looks bare. This isn’t just annoying, it’s risky for your decision-making and mental health as a business owner.
Let’s unpack why this happens and what you can do about it.
Timing’s Everything
Profit is recorded once income is earned, not when your invoices are actually paid. So, if you’ve got outstanding invoices, they still count towards profit. The same goes for expenses – you might have logged them, but that doesn’t mean you’ve paid them yet. Make it a habit to review what you’re owed and what you owe every week to keep your finger on the pulse of what’s actually yours to spend.
Big Buys Can Be Tricky
Let’s say you splash out on a $5,000 laptop. That’s a big whack to your bank account now, but in your books, it’s depreciated over a few years, hardly making a dent in this year’s profit. What to do? Plan for big buys by setting up a buffer or sinking fund to soften the blow on your cash flow.
Loan Repayment Reality Check
Your Profit and Loss statement shows only the interest part of loan repayments, not the principal. This means most of your payment disappears from your bank balance. Always factor the full repayment into your cash flow forecast to prevent nasty surprises.
Dealing with Taxes and Super
Your profit might look the business, but ignoring tax obligations like GST or super can clear out your cash reserve. A smart move? Open a special tax account and consistently move 15 to 30% of your income into it.
Paying Yourself Properly
Drawing or taking dividends instead of a steady wage? That might not hit the Profit and Loss statement, but your bank account will feel it. Treat paying yourself like any other business expense in your cash planning.
The big idea here is managing your cash carefully, not just your profit. Think of profit as a story, while cash is about survival. Start using a cash flow tracker every week. Consider the Profit First approach, putting money into specific buckets and using separate bank accounts to stay organised.
Here’s a simple step to kick things off: open a bank account named “Tax” and start moving 50% of every payment you receive into it. Even if a big tax bill doesn’t seem like it’s around the corner, getting into this habit will save you a lot of stress down the line.
Now, if you’ve ever wondered, “Where did all the profit go?” you’ve got a better idea of why this happens, and more importantly, how to stop the cycle. If you found this helpful, share it with another business owner who could also use this advice. Leave us a review and join our mission to empower more business owners to put their money first. Remember, when your money comes first, the rest follows naturally.
