Published: January 2026
There is a surprisingly common situation among Australian business owners: the bank account has money in it, revenue is growing, but something does not feel right. Bills get paid late. Cash is tight before payroll. The end of quarter always brings stress.
The business appears successful, but is it actually profitable?
For many owners, the answer is not clear. They confuse cash with profit, mix personal and business finances, and lack the visibility to know what is really happening.
This guide explains how to see through the confusion and understand whether your business is genuinely making money.
The most common confusion is treating cash in the bank as a measure of success.
Cash and profit are different things:
1. Cash is what you have in the bank right now. It reflects the timing of money coming in and going out.
2. Profit is revenue minus expenses over a period, regardless of when cash moves. It measures whether your business model is working.
You can have cash without profit. A business that just received a large customer payment may have plenty of cash, but if expenses exceed revenue, it is losing money. The cash is temporary.
You can have profit without cash. A profitable business with slow-paying customers may struggle for cash while waiting for invoices to be paid. The profit is real, but so is the cash crunch.
Confusing the two leads to bad decisions. Spending cash that looks available but represents future obligations. Or panicking about cash while ignoring underlying profitability.
Several factors muddy the waters for business owners:
1. Mixed finances. When personal and business money mingle in the same accounts, it becomes nearly impossible to see what the business is actually doing. Owner expenses hide in business accounts. Business income flows into personal spending.
2. Owner drawings. Most business owners take money out of the business for personal living expenses. These "drawings" are not business expenses, but they reduce cash. If you are drawing more than the business earns, cash declines even while the business might be profitable.
3. Reinvestment. Profitable businesses often reinvest earnings in growth: hiring, equipment, marketing. This is good for the future but consumes cash today. The business is profitable, but it does not feel that way because cash is always being deployed.
4. Timing mismatches. You pay suppliers before customers pay you. You incur costs before revenue arrives. These timing differences create cash pressure that has nothing to do with profitability.
5. Poor reporting. Many business owners do not have regular profit and loss statements. They make decisions based on bank balance rather than actual financial performance.
You cannot understand business profitability if personal and business finances are intertwined. This is fundamental.
Actions to take:
This separation is not just about tax compliance. It is about visibility. Until you separate the finances, you are guessing about profitability.
With clean separation, your profit and loss statement tells the story. Here is what to look for:
- Gross profit. Revenue minus direct costs (cost of goods sold or cost of services delivered). This shows whether your core business model works. If gross profit is low or negative, you have a pricing or efficiency problem.
- Operating expenses. The costs of running the business: rent, wages, utilities, marketing, professional fees. These happen regardless of how much you sell.
- Net profit. Gross profit minus operating expenses. This is what the business actually earns before tax and owner compensation.
- Owner compensation. What you pay yourself, whether as wages, superannuation, or drawings. This needs to come from profit.
The key question: is net profit sufficient to compensate you fairly for your work AND provide a return on the capital and risk you have invested?
If net profit is $80,000 and you are working 60-hour weeks, you are earning roughly $25 per hour before tax. Is that acceptable? Would you work that hard for someone else at that rate?
Raw profit numbers can be misleading. To understand true profitability, adjustments are often needed:
- Owner salary normalisation. If you are not paying yourself market rate, add a notional salary to expenses. A business that shows $100,000 profit but involves an owner working full-time for free is really breaking even once you account for the owner's labour.
- One-off items. Remove unusual income or expenses that will not recur. A large one-time sale or an insurance payout inflates profit artificially. An unusual legal expense or equipment failure deflates it.
- Related party transactions. If you are paying rent to yourself, or buying services from related parties, are those amounts at market rate? Artificially high or low related party payments distort the picture.
- Add-backs. Some expenses recorded in the business might be partially personal: vehicle costs, travel, entertainment. For a true view of business profitability, be honest about what is genuinely business versus personal benefit.
After these adjustments, you have "normalised profit" or "owner benefit": what the business actually generates for its owner.
Here are practical questions that cut through complexity:
Could you pay a replacement? If you stepped back from day-to-day work and hired someone to do what you do, could the business afford their salary and still have profit left over? If not, you are working for below-market wages.
Would someone buy this business? Buyers pay for profit. If your business does not generate real profit (after paying a manager to run it), it has limited value beyond its assets.
Is profit growing with revenue? If revenue goes up but profit stays flat or declines, you have a scaling problem. Growth should improve profitability, not just add complexity.
Can you take a holiday? If the business cannot function without you, and cannot afford to pay for coverage, profitability is likely thin or nonexistent.
Are you building wealth? At the end of each year, has your net worth increased from business activity? If you are working hard but not building wealth, something is wrong.
Watch for these patterns:
To maintain ongoing visibility into profitability:
1. Monthly profit and loss. At minimum, review a P&L monthly. Understand what drove the result.
2. Comparison to budget. Set annual targets and track against them. Variance analysis reveals where reality differs from expectation.
3. Trailing metrics. Look at trends over 3, 6, and 12 months. Monthly variation is normal; consistent patterns are meaningful.
4. Cash flow forecasting. Separate from P&L, understand where cash is going. A 13-week rolling forecast prevents surprises.
5. Regular review rhythm. Block time monthly to review financials. Do not just glance at numbers; think about what they mean.
Cash is what is in your bank account right now. Profit is revenue minus expenses over a period. You can have cash without profit (temporary situation) or profit without cash (timing issue with customer payments). Both matter, but they measure different things.
Calculate what you would need to pay someone to do your job. If you are taking less than that from the business, you are subsidising the business with unpaid labour. True profitability should be measured after fair owner compensation.
Without separation, you cannot see what the business is actually earning versus what you are spending personally. Mixed finances hide true profitability and make financial management nearly impossible.
Normalised profit adjusts reported profit for owner compensation, one-off items, and related party transactions to show what the business truly generates. This is the number that matters for understanding value and making decisions.
Monthly at minimum. More frequent if cash is tight or the business is changing rapidly. Regular review rhythm prevents surprises and enables timely adjustments.
Common causes include: declining margins (costs rising faster than prices), increased reinvestment (spending on growth), timing mismatches (paying suppliers before collecting from customers), or increased personal drawings. Review your P&L and cash flow to identify the specific cause.
Scale Suite provides the financial visibility Australian SMEs need to understand true profitability. Our services include:
We work with businesses across Australia to replace confusion with clarity. If you are unsure whether your business is truly profitable, we can help you find out.
Contact us at hello@scalesuite.com.au or visit scalesuite.com.au.
This article provides general information about business profitability. Individual circumstances vary, and you should consider your specific situation when evaluating your business performance.
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