You’ve just been told the business made a good profit. You’re pleased. You’re also doing arithmetic in the back of your head about Thursday’s wages, because the account doesn’t look like a good profit.
That gap is not an error, and it isn’t unusual. Profit and cash are two different measurements of the same twelve months, and once you can see why they diverge, the number stops being a mystery and starts being something you can manage.
Three reasons the two numbers separate
Almost every difference between profit and cash falls into one of three buckets. Knowing which bucket you’re in tells you what to do about it.
Bucket one: same money, counted on different days
Your profit and loss statement records a sale when you invoice it. Your bank account records it when the customer pays. Same money, different day.
The same applies in reverse to costs you’ve incurred but not yet paid. So if your debtors balance climbs over a quarter, you’ve earned the profit and funded the work without receiving the cash. Nothing has gone wrong. The money is sitting in someone else’s account with your name on it.
This bucket is the most common, and the most fixable. Reduce what your customers owe you and the cash arrives without you selling anything more.
Bucket two: cash that moved, profit that didn’t
Some of the biggest movements in and out of your bank account never appear on a profit and loss statement at all.
Buying a vehicle or a piece of plant is an investment, not an expense, so it sits on the balance sheet. Repaying the principal on a loan reduces your cash without reducing your profit. Money you draw out of the business to live on isn’t a business cost. Stock sitting in the shed has consumed cash but hasn’t been sold, so it hasn’t touched your margin yet.
This is the bucket that surprises people most, and it’s why a strong year on paper can coincide with the tightest cash position you’ve had.
Bucket three: entries that never involve cash
Depreciation is the clearest example: a way of spreading the cost of an asset you’ve already paid for across the years you use it. It reduces reported profit. It doesn’t take a cent out of the account.
Tax sits awkwardly across the buckets too, because the timing of what you pay rarely lines up neatly with the year the profit was earned.
What actually fixes it
Not a bigger spreadsheet. Three things:
- Know what your customers owe you, today. Not roughly. The number.
- See the next 13 weeks. What’s coming in, what’s going out, which weeks will pinch.
- Put tax aside as you go. Money in a separate account from every sale turns a payment date into a non-event.
Where we fit
Most accountants stop at producing the numbers. We produce them, then make sure you can act on them. If you’ve ever sat in a profit meeting quietly wondering where the money went, that isn’t a gap in your ability. It’s a gap in how the numbers were explained.
Working out which bucket your business is sitting in takes about an hour. It’s foundation work under our Clarity pillar, and it’s usually the hour that changes how an owner reads every report afterwards.
If the business can’t run without you watching the bank account, let’s change that. Visit cyrepartners.com.au and get in touch →
Cyre Partners — Empowering Smarter Business Choices.