Profitable but no cash in the bank? Where the money went
Why a small business can show a profit and still have no cash in the bank, and how an NZ owner can find where the money went.
What this guide covers
Profit and cash measure different things. Profit is what you earned in a period: the work done or goods sold, less what it cost to do. Cash is what actually moved through the bank. The gap between them is timing, plus money that never shows on the profit report: customers who have not paid yet, stock on the shelf, loan repayments, tax, equipment and what you take out for yourself. Find which of those is holding your cash before you try to sell more.
Why profit and cash are not the same number
Your profit and loss report, the P&L, counts a sale when you send the invoice. It counts a cost when you use it. Your bank account only counts money when it arrives or leaves. The two always drift apart a little. When they drift a lot, the business looks healthy on paper and still struggles to pay wages.
Most accounting software can show the P&L two ways: on invoices (often called accrual) or on payments (cash basis). This guide assumes the invoice basis, because that is where the gap shows up. If you are not sure which one you are looking at, ask your bookkeeper or accountant.
These are the seven places the cash usually goes:
Customers who have not paid. An invoice counts as a sale the day you send it. The cash arrives weeks later, or not at all. Every dollar owed to you is your money funding their business.
Stock and materials. Buying stock empties the bank, but it only becomes a cost on the P&L when it is sold or used. A full storeroom or a van full of parts is cash you cannot spend.
Suppliers who want paying first. If you pay suppliers faster than customers pay you, you fund the gap in between. The bigger the job, the bigger the gap.
GST and income tax. If you are GST registered, part of every sale belongs to IRD and leaves on your next GST return. Income tax, including provisional tax if you pay it, comes out of profit you may have already spent.
Loan repayments. Only the interest is a cost on the P&L. The part that pays the loan down, the principal, leaves the bank but never shows in profit.
What you take out. Drawings, the money you take for yourself, are usually not a cost on the P&L. A wage paid to you through payroll is. Either way, it comes out of the same account.
Equipment and vehicles. A new van or oven leaves the bank in one go. The P&L spreads it over several years as depreciation. In the year you buy it, cash drops far more than profit does.
An illustration: $8,000 profit, and $6,000 less in the bank
These numbers are made up and rounded to show how the gap works. They are not from a real business, and they are not a benchmark.
Picture a small trades business. In one month it invoices $40,000 of work, before GST. Materials used cost $12,000, wages $14,000, and rent and other overheads $6,000. The P&L shows a profit of $8,000: $40,000 less $12,000, less $14,000, less $6,000.
In the same month, this is where cash went that the P&L does not show:
$6,000 more is owed by customers at the end of the month than at the start.
$2,000 more stock and materials were bought than were used on jobs.
$1,000 of loan principal was repaid. Only the interest was on the P&L.
$4,000 was taken out by the owner as drawings.
$1,000 went on a new tool, which the P&L will spread over several years.
That adds up to $14,000: $6,000 + $2,000 + $1,000 + $4,000 + $1,000. Take $14,000 from the $8,000 profit and the bank ends the month $6,000 lower than it started. The P&L says the month went well. The bank says it did not. Both are right.
GST is left out to keep the sums simple. If the business is GST registered, the GST it collected sits in the bank until the return is paid. That makes the balance look better than it is.
How to find where your cash went
Take the last three months. You need your P&L, your bank statements and your aged debtors list: the report of who owes you what, and for how long. Then check five things:
Who owes you money. Total the unpaid invoices and count how many are past their due date. Compare it with the same list three months ago.
What is on the shelf. Count or estimate the stock and materials you hold. Has it grown?
When you pay against when you get paid. Write your usual supplier terms next to how long your customers actually take.
What left the bank but not the P&L. Loan principal, drawings, equipment, and GST and tax payments.
What is set aside. Is money put aside for the next GST return and the next tax bill, or is it spent as it arrives?
Put a dollar figure on each one and rank them. The biggest is where to start.
What to do first
If customers owe you the most: ring every invoice past its due date this week. Then check your terms, invoices and reminders. The payment process checker walks through each step.
If stock holds the most: stop reordering the lines that are not moving until they sell, and buy the fast lines in smaller lots.
If suppliers get paid before customers pay you: ask for a deposit or progress payments on big jobs, so the customer funds the materials, not you.
If tax keeps catching you out: move GST and a share of profit for income tax into a separate account each time you are paid. Ask your accountant what share to set aside.
If drawings or loan repayments are the gap: that is a profit problem showing up as a cash problem. The business may not earn enough to pay you and the loan at the same time. Look at your prices and costs before you look at the bank.
This is general information, not accounting or tax advice. Your accountant can check it against your own figures.
The steps
Check whether your profit report is on the invoice basis or the payments basis.
Pull three months of P&L, bank statements and the aged debtors list.
Put a dollar figure on unpaid invoices, stock, loan principal, drawings, equipment and tax.
Rank those by size and start with the biggest.
Set aside GST and income tax as you are paid, not when the bill arrives.
How can I be making a profit when I can’t pay the bills?
Profit counts a sale when you invoice it and a cost when you use it. Bills are paid from the bank. If customers are slow, stock is building up, or money is going on loans, drawings or equipment, the bank can fall while profit goes up.
Can I pay rent with an invoice?
No, and that is the whole problem. An unpaid invoice is profit on paper and nothing in the bank. Tighter payment terms, deposits on big jobs and chasing overdue invoices early all turn it into cash sooner.
Is the GST in my account my money?
No. If you are GST registered, the GST you collect on sales is owed to IRD and paid on your GST return, less the GST you can claim on your own costs. Treat it as money you are holding for IRD.
Should I just try to sell more?
Not until you know where the cash is going. More sales on slow payment terms, or with stock bought up front, can make the gap bigger before it makes it smaller.