Profit vs. Cash Flow: Why Your Business Might Be Making Money But Still Feel Broke

There’s nothing more frustrating than seeing a profit on paper but struggling to pay your bills. If this sounds familiar, you’re not alone! Many business owners confuse profit and cash flow, but understanding the difference is key to keeping your business financially healthy.

Let’s break it down and explore how to manage your cash flow effectively so you don’t end up in a cycle of stress.

What’s the Difference Between Profit and Cash Flow?

Many business owners assume that if their business is profitable, they should have plenty of money in the bank. Unfortunately, that’s not always the case. Here’s why:

• Profit is what’s left over after all income and expenses have been accounted for. It’s what your business earns on paper.
• Cash flow is the actual money moving in and out of your business at any given time.

You could have a profitable business but still struggle to pay your bills if your cash flow is mismanaged.

Why Do Profitable Businesses Run Out of Cash?

There are a few key reasons why a business can be profitable but cash-poor:

1. Late Payments from Clients

Small businesses often deal with slow-paying clients. If you’re waiting weeks (or even months) to get paid, your cash flow takes a hit. The fix? Clear payment terms, upfront deposits, and automated reminders.

2. Spending More Than You’re Bringing In

Even profitable businesses can overspend. If you’re investing in equipment, new staff, or expansion before your cash flow can handle it, you could end up in financial trouble. The fix? A solid budget and tracking cash flow closely.

3. Holding Too Much Stock

If you run a product-based business, too much inventory can tie up cash. You’ve paid for stock, but it’s sitting on the shelf instead of turning into cash. The fix? Smarter inventory management.

4. Large Bills and Unexpected Expenses

Big bills like BAS, superannuation, or annual insurance premiums can put pressure on your cash flow. If you’re not setting money aside, they can catch you off guard. The fix? Regular cash flow forecasting.

5. Profit Tied Up in Assets

If your business invests in expensive equipment, vehicles, or property, your profit may be locked away in assets rather than available as cash. The fix? Understanding when to buy outright vs. finance.

How to Improve Your Cash Flow & Stop Feeling Broke

1. Set Clear Payment Terms & Follow Up

• Shorten your payment terms (e.g., 7 or 14 days instead of 30+ days).
• Request upfront deposits for big jobs.
• Use accounting software (like Xero or QuickBooks) to send automated reminders.

2. Plan for Large Expenses

• Put aside money for tax, super, and other big bills weekly or monthly.
• Create a cash flow forecast so you’re not caught off guard.

3. Keep Business & Personal Finances Separate

• Many business owners struggle because they dip into business funds for personal use.
• Set yourself a regular wage instead of taking out random amounts.

4. Track Your Cash Flow Weekly

• Check your bank balance, incoming invoices, and upcoming expenses every week.
• Use software to automate tracking instead of relying on spreadsheets.

5. Get Professional Help

• A bookkeeper can help you stay on top of cash flow, track expenses, and avoid financial stress.
• They can also help you set up automation to make invoicing and bill payments easier.

Final Thoughts

Your business can be profitable but still struggle if you don’t manage cash flow properly. The key takeaway? Profit is important, but cash flow keeps your business running.

By implementing better invoicing, budgeting, and forecasting, you’ll feel more in control and won’t be caught short when bills come in. And if you need help getting your books in order, working with a bookkeeper can make all the difference.