Your business is making a profit. So why does it sometimes feel like there’s never enough money in the bank?
It’s one of the most common conversations we have with small business owners at Oculus Accountants.
The confusion often comes from treating profit, cash flow and solvency as though they are the same thing.
They’re not!
Understanding the difference can give you a much clearer picture of the financial health of your business.
Profit: Are you actually making money?
Profit is essentially what remains after the expenses of the business are deducted from its income.
It’s an important measure of performance, but there’s a catch: profit on your Profit & Loss Statement doesn’t necessarily equal cash in your bank account.
Imagine your business completes $100,000 worth of work and invoices your customers. That revenue may contribute to your accounting profit, but if those customers haven’t paid you yet, the cash isn’t available to pay wages, suppliers, loan repayments or tax obligations.
That’s why a profitable business can still experience serious financial pressure.
Cash flow: Can you pay the bills?
Cash flow looks at the money actually moving into and out of your business.
And for many small businesses, this is where the pressure occurs.
You might have strong sales and plenty of work ahead, but your cash can become tied up in unpaid customer invoices, stock or equipment.
At the same time, wages, rent, suppliers, loan repayments, GST, PAYG withholding and superannuation continue to fall due.
The timing of those cash movements matters.
If customers routinely take 45 or 60 days to pay you while your suppliers require payment within 14 or 30 days, you’re effectively funding that gap.
As accountants, one of the questions we encourage business owners to ask isn’t simply “Are we profitable?” but “Where is our cash going?”
Solvency: Can the business meet its debts?
Solvency takes the conversation one step further.
For companies, the critical question is whether the business can pay its debts as and when they become due.
This is why business owners and directors should pay attention to warning signs such as:
- consistently overdue creditors,
- increasing tax debt,
- difficulty meeting superannuation obligations,
- maxed-out finance facilities or
- continually using tomorrow’s income to pay yesterday’s bills.
These issues shouldn’t automatically create panic – but they shouldn’t be ignored either.
Look at the whole picture
A healthy business needs more than sales.
It needs sustainable profit, healthy margins and sufficient cash flow to meet its obligations.
At Oculus Accountants, we believe good accounting isn’t simply about looking backwards and reporting what happened last financial year.
It’s about helping business owners understand what their numbers are telling them today – so they can make better decisions about tomorrow.
If your business looks profitable on paper but you’re continually wondering where the cash has gone, it may be time to look beyond the Profit & Loss Statement.
Understanding your cash flow could be one of the most important financial conversations you have about your business.
