How Can We Be Profitable But Without Cash?

If summer is not your best trading time, then planning your cash flow is especially important for you. 

Remember – profit IS NOT the same as cash flow!


One of the most important lessons business owners have to learn, often painfully, is that cash really is critical. We’re not talking about actual paper money – we’re talking about cash flow.

Basically, it doesn’t matter how much money is coming in the future if you don’t have enough money to get through day to day.

  • Employees can’t wait on their wages until your customers pay.
  • Your landlord doesn’t care that you’re talking to investors and will have the money in a couple of months.
  • Suppliers may not be willing to extend your credit any further and you may not be able to purchase the goods you need in order to deliver to your customer and receive payment.

More businesses fail for lack of cash flow than for lack of profit.

Why is this? There are two main reasons;

  1. Business owners are often unrealistic in predicting their cash flow. They tend to overestimate income and underestimate expenses.
  2. Business owners fail to anticipate a cash shortage and run out of money, forcing them to suspend or cease operations, even though they have active customers.

For example, many retailers incur large outflows of cash prior to the Christmas season in order to build inventory.  This cash outflow does not constitute a loss.  However, a business owner must anticipate and plan to have enough cash on hand to pay vendors or make other finance arrangements in advance.  Likewise, companies who experience a drop in business over the Christmas period (e.g. shut down or have seasonality lows) need to plan ahead for the reduced income.  This especially applies to service based businesses.

So what’s the difference between profitability and cash flow?

Profit is the difference between income and expenses. Income is calculated at the time the sale is made, rather than when full payment is received. Likewise, expenses are calculated at the time of purchase, rather than when you pay the bill.

Cash flow is the difference between actual incoming cash and actual outgoing cash.  Cash revenue is not a reality until payment is received, so slow debtors can make a significant difference.  Expenses are not calculated until payment is made.  Cash flow can also include injections of working capital from investors or debt financing.  Outflows include GST, tax, inventory purchased, new assets etc.  These don’t impact profit but do impact cash.

Preparing accurate cash flow projections on a regular basis is one of the most important things a small business can do – alerting you to potential problems before they arise.

All business owners could benefit from cash flow planning.  The more you work with your numbers the better you will become in managing your cash flow.

For those businesses where summer is not your best trading period, it’s even more critical to have cash flow projections in place.  Income can decrease leading up to the Christmas period, holiday pay needs to be paid and in January, there are extra hits with Prov tax, GST and PAYE all due at the same time.  This is also a time when businesses are looking at how to ramp up for the New Year, which could mean increased costs.

Love to Grow can work with you to model your cash flows, profit and balance sheet for short term or the next 1-3 years so you can;

  • Make better business decisions
  • Do your own ‘what if’ analysis using the spreadsheets we create for you
  • Update your key drivers and assumptions yourself if wanted
  • See where to better manage your cash flow
  • See what tax and GST payments will be needed as your business changes
  • Have a budget to import into other systems such as Xero
  • See how strong your balance sheet will be and profit levels you will achieve
  • Improve your tax planning
  • Understand how much cash you can afford to use personally from your business

You can also learn which area you need to focus on most to unlock the cash in your business via a Business Improvement Scorecard Report – a number of our clients have literally unlocked over $100k cash into their bank account within 6-12 months.   You’d be amazed at how small incremental adjustments can make a big difference to your bottom line.

Check out Love to Grows’ workbooks on Understanding Business Cash flow and Improving Business Cash Flow or contact Love to Grow now for a free chat about your business needs.

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