You are sitting with your accountant. They have just told you the business made $500,000 profit last year. You should feel great.
But you are looking at your bank balance: $12,000. You cannot reconcile these two facts. You made half a million dollars. Where is it?
Your accountant starts talking about accruals, depreciation, and working capital. Your eyes glaze over. You leave the meeting more confused than when you walked in.
Here is the explanation in plain English, using a single worked example.
Let's call it "TradeCo." A construction and maintenance business based in Sydney. 22 employees. Revenue of $4 million. The profit and loss for the financial year says net profit of $500,000.
At the start of the year, TradeCo had $180,000 in the bank. At the end of the year, it has $12,000. The business "made" $500,000 but the bank balance dropped by $168,000.
Here is exactly where the money went.
Start with profit: $500,000
This is the number from the profit and loss. But the P&L follows accounting rules, not cash rules. Several things that consumed cash are not on the P&L, and several things on the P&L did not involve cash.
TradeCo owns vehicles and equipment. Depreciation is an expense on the P&L but no cash left the building. The cash left when you bought the asset, which might have been three years ago. Depreciation is an accounting entry that spreads the cost over the asset's useful life.
Running total: $500,000 + $65,000 = $565,000 available
At the start of the year, clients owed TradeCo $330,000. At the end of the year, clients owed $450,000. That $120,000 increase is revenue the P&L counted as income, but the cash has not arrived.
Why did receivables increase? TradeCo grew 12% during the year. More revenue means more invoices outstanding. They also took on a large commercial client who negotiates 60-day payment terms instead of the usual 30. Revenue looked great. Cash was lagging behind.
Running total: $565,000 - $120,000 = $445,000
TradeCo stocks materials for maintenance contracts. To support the growth, they increased stock holdings from $95,000 to $140,000. That $45,000 in extra stock sitting in the warehouse is cash that has been spent but will not hit the P&L until the materials are used on a job.
Running total: $445,000 - $45,000 = $400,000
Company income tax at 25% on $500,000 profit is $125,000. Plus the GST timing difference of about $10,000 (GST collected exceeded GST paid during the year because of growth). That $135,000 went straight to the ATO.
Running total: $400,000 - $135,000 = $265,000
TradeCo has a vehicle fleet financed through chattel mortgages and an equipment loan. Total principal repayments during the year: $72,000. Only the interest portion ($18,000) appeared on the P&L. The $72,000 in principal repayment reduced the bank balance but is not an expense on the profit and loss.
Running total: $265,000 - $72,000 = $193,000
TradeCo bought a new service vehicle mid-year for $55,000 cash. This does not appear on the P&L as an expense. It appears on the balance sheet as an asset and will depreciate over 5 to 8 years. But the cash is gone now.
Running total: $193,000 - $55,000 = $138,000
The two directors drew a combined salary of $150,000 plus dividends of $30,000 during the year. Owner remuneration through a company structure appears partly on the P&L (salary as an expense) and partly below the line (dividends from profit). The total cash drawn by the owners was $180,000.
Running total: $138,000 - $180,000 = -$42,000
TradeCo was behind on super contributions at the start of the year. They caught up during the year, paying $15,000 more in super than what was expensed in the current year P&L.
Running total: -$42,000 - $15,000 = -$57,000
TradeCo owed suppliers $25,000 more at year-end than at the start of the year. This means they consumed $25,000 worth of goods and services that they had not yet paid for. The expense is on the P&L, but the cash has not left yet.
Running total: -$57,000 + $25,000 = -$32,000
Cash movement for the year: negative $32,000
But the bank dropped by $168,000 ($180,000 to $12,000). The extra $136,000 difference comes from the fact that $136,000 of last year's end-of-year cash was spoken for by liabilities that had not yet been paid (previous year's tax, super catch-up, and year-end supplier payments that landed in July).
In short, TradeCo started the year with $180,000 in the bank, but roughly $136,000 of that already belonged to the ATO, super funds, and suppliers. The real available cash at the start of the year was closer to $44,000. Subtract the $32,000 net cash outflow, and you land at $12,000.
Every dollar is accounted for. Nobody stole anything. The business genuinely made $500,000 in profit. It also genuinely consumed $532,000 in cash for things the P&L either ignores or treats differently from reality.
1. Managed debtor days. The $120,000 increase in receivables is the biggest single cash drain. If TradeCo had maintained 30-day debtor days instead of letting the new commercial client push to 60 days, approximately $60,000 to $80,000 more cash would have been available. Faster invoicing, stricter terms, and weekly collections follow-up are free to implement.
2. Provisioned for tax separately. Having $136,000 in year-start cash that was already owed to the ATO and super funds is a trap. A separate bank account holding tax and super provisions would have made the real cash position visible from day one. The owners would have known they had $44,000 available, not $180,000.
3. Timed the vehicle purchase better. Buying a $55,000 vehicle with cash during a year of growth placed additional strain on working capital. Financing the purchase (even at a modest interest rate) would have preserved cash for operations.
For a deeper dive into this dynamic, read our guide on why cash feels tight when profits look fine and why revenue growth worsens cash flow.
Is it normal for profit and cash to be different?
Yes, always. Profit and cash are measured using different rules. The P&L follows accrual accounting (counting revenue when earned and expenses when incurred). Cash flow follows actual money in and money out. They will never match, but the gap should be understood and managed.
How do I track where cash is going each month?
Ask your bookkeeper or accountant for a cash flow statement alongside your P&L. The cash flow statement reconciles profit to actual cash movement by showing changes in receivables, payables, loan repayments, and asset purchases. Alternatively, use our cash flow forecast calculator.
What is a healthy cash buffer for my business?
A general rule is 3 months of fixed costs. For TradeCo with approximately $250,000 in monthly fixed costs (wages, rent, insurance, loan repayments), a healthy buffer is $750,000. Having $12,000 is dangerously low.
Should I set up a separate bank account for tax?
Yes. This single action prevents more cash crises than any other. Every time revenue arrives, immediately transfer the estimated GST (roughly 1/11th of GST-inclusive revenue) and PAYG/super provisions into a separate account. Do not touch that account for operations.
My profit is lower than this example and I still have no cash. Is there any hope?
The dynamics are the same at every scale. A business making $100,000 profit can have zero cash for the same reasons (growth consuming working capital, loan repayments, tax timing, owner drawings). The fix is the same: manage debtor days, provision for tax, and match your drawings to what the business can genuinely sustain.
Scale Suite provides monthly profit-to-cash reconciliation as standard in all client reporting. Our reports show exactly where cash went, flagging the key movements (debtor changes, tax liabilities, loan repayments, asset purchases) so you never have to wonder why profit and bank balance do not match.
We also set up GST and tax provisioning systems to ensure BAS payments and income tax are never a surprise.
Request your free proposal or book a 30-minute call.
Scale Suite delivers embedded finance and human resource services for ambitious Australian businesses. Our Sydney-based team integrates with your daily operations through a shared platform, working like part of your internal staff but with senior-level expertise. From complete bookkeeping to strategic CFO insights, we deliver better outcomes than a single hire - without the recruitment risk, training time, or full-time salary commitment.
Scale Suite delivers embedded finance and human resource services for ambitious Australian businesses.Our Sydney-based team integrates with your daily operations through a shared platform, working like part of your internal staff but with senior-level expertise. From complete bookkeeping to strategic CFO insights, we deliver better outcomes than a single hire - without the recruitment risk, training time, or full-time salary commitment.
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