Published: January 2026
Your profit and loss shows $50,000 profit. But your bank balance actually dropped by $40,000. Where did the money go?
Here is exactly how that happens:
Your P&L says you made money. Your bank says you lost it. Both are accurate. Only one pays wages.
Around 80% of Australian SMEs experienced cash flow impact in the last 12 months according to CommBank's 2025 survey. This disconnect between profit and cash is one of the most common problems SME owners face.
Your profit and loss statement is an accounting construct based on rules and timing assumptions. Your bank account is reality.
The P&L shows revenue when earned, not when received. It shows expenses when incurred, not when paid. It includes non-cash items like depreciation. It excludes cash movements like loan principal.
Both numbers are true. Only one determines whether you can pay bills.
There are many causes of cash flow problems, but two matter most. Focus here first.
This measures how long clients take to pay you.
At $1 million annual revenue with 45-day payment terms, roughly $125,000 is constantly tied up in receivables. That is money earned but not accessible.
Aha moment: Your clients are borrowing $125,000 from you, interest-free, permanently. Every day you reduce debtor days releases cash immediately.
Reducing from 45 to 30 days frees approximately $40,000 instantly. No extra sales required.
Many businesses invoice at month end for work done throughout the month. This adds 15 to 30 days delay before the payment clock even starts.
These cost nothing to implement and can dramatically improve cash position.
Key insight: You fund the gap between paying suppliers and clients paying you. Shrinking that gap beats chasing new sales.
The formula: Cash conversion cycle = Debtor days + Inventory days minus Creditor days
Example: If clients pay in 45 days, stock sits 30 days, and you pay suppliers in 20 days, your cash cycle is 45 plus 30 minus 20 equals 55 days.
You need to fund 55 days of working capital before cash returns. Reducing debtor days by 15 drops this to 40 days, releasing significant cash.
Superannuation at 12%: Rate increased from 1 July 2025. More cash leaves every pay cycle compared to previous years.
GST timing: GST collected sits in your account looking available. It is not yours.
Aha moment: Spending GST collected is like taking a high-interest loan from the ATO without paperwork.
ATO debt interest: From July 2025, interest on ATO debt is no longer deductible. Carrying ATO debt just became more expensive.
BAS shocks: Predictable crises every quarter for businesses not setting aside provisions.
Counterintuitively, growth often worsens cash flow.
Growing from $1 million to $1.5 million means receivables grow proportionally. If $125,000 was tied up at $1 million, roughly $185,000 is tied up at $1.5 million. You need to fund an extra $60,000 just to grow.
Similarly, you hire before revenue arrives. Wages start immediately while revenue impact takes months.
This is why profitable growing businesses run out of cash. Growth consumes cash faster than profits generate it.
1. Loan principal: Repayments reduce bank balance but are not expenses on P&L. Only interest appears as expense.
2. Owner drawings: If drawing more than profit, you are depleting the cash base.
3. Equipment purchases: Leave account immediately but depreciate slowly on P&L over years.
4. Work in progress: Long projects mean costs incurred before invoicing.
Every Monday, take five minutes:
This five-minute habit kills surprises. Most cash crises are predictable weeks in advance if you are looking.
1. Speed up cash in:
2. Slow down cash out:
3. Improve visibility:
Cash movement = Net profit + Depreciation minus Working capital increase minus Loan principal minus Owner drawings
If net profit is $50,000, add $10,000 depreciation (non-cash expense), subtract $30,000 working capital increase, subtract $20,000 loan principal, subtract $15,000 drawings.
Cash movement equals negative $5,000 even though P&L showed $50,000 profit.
Run this quarterly to understand where cash actually goes.
Why is bank balance low when profit looks good? Because profit and cash are measured differently. P&L counts revenue when earned, not received, and excludes loan principal and working capital changes.
What are debtor days and why do they matter? Debtor days measures how long clients take to pay. High debtor days means more cash trapped. Reducing from 45 to 30 days can free significant cash immediately.
How do I improve cash flow quickly? Invoice faster and collect faster. Invoice on delivery. Chase weekly. Require deposits. These are free to implement with immediate impact.
Should I offer discounts for early payment? A 2% discount for 7-day payment can be worthwhile if it significantly reduces debtor days. Calculate whether the discount costs less than the financing cost of trapped cash.
How often should I check cash position? Weekly at minimum. Many owners who check only monthly are surprised by avoidable problems.
Calculate your debtor days right now: Accounts Receivable divided by average daily revenue. If it is over 35 days, that is your biggest cash leak. Fix your invoicing and collection process this week.
Scale Suite provides daily visibility into your cash position, not month-end reports that arrive too late.
We track debtor days, monitor cash conversion cycle, and alert you to problems before they become crises. We help set up proper GST and tax provisioning so BAS quarters are never a surprise.
Our clients consistently say understanding cash flow was the single biggest improvement to their business confidence and decision-making.
Sources: CommBank SME Survey 2025, ATO (March 2025 update)
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