Quick answer
A business can show a profit and still run short of cash because profit counts sales when they're made, while cash only counts money actually received and paid. Common hiding places are unpaid invoices, unsold stock, loan principal repayments, tax set-asides, owner drawings, equipment purchases and prepaid costs. Find each one and you can free cash without making a single extra sale.
Key points
- Profit and cash measure different things.
- Unpaid invoices and unsold stock are the biggest hiding places.
- Loan principal, tax and drawings leave the bank but not the profit figure.
- Finding the leak is cheaper than borrowing to cover it.
The accountant says you made $140k this year. The bank balance says you can barely cover Friday’s pay run. Both are true, and the difference between them is one of the most confusing things in small business.
Profit is an accounting idea. Cash is what’s in the account right now. Here are seven places the gap tends to hide.
1. Unpaid invoices
When you invoice, your accounts record a sale. Your bank records nothing until the customer pays. If your debtors list has grown from $30k to $90k over a year, that’s $60k of “profit” that is stuck in other people’s accounts.
How to find it: run an aged debtors report in Xero or MYOB. Look at anything over 30 days.
How to free it: call the largest overdue accounts this week, tighten terms and take deposits. Our guide on getting invoices paid faster lays out the steps.
2. Stock sitting on shelves
Stock is bought with cash but only counts as cost when it sells. A warehouse full of slow-moving lines is cash turned into cardboard.
How to find it: list stock by how long it has been held. Anything older than a season is suspect.
How to free it: discount or bundle slow lines, return what you can, and stop reordering things that don’t move. Put the money where stock turns fastest. See cash for stock for funding what does sell.
3. Loan principal repayments
Here’s a quiet one. When you repay a loan, only the interest is a cost in your profit and loss. The principal comes out of the bank but never touches profit. A business with big equipment finance can look comfortably profitable while a large chunk of cash leaves each month.
How to find it: list every loan and lease with its monthly repayment, and split principal from interest.
How to free it: consider whether longer terms or consolidation would reduce the monthly outflow. Our page on cash-flow loans is a starting point.
4. Tax you haven’t set aside
GST collected, PAYE withheld and provisional tax all sit in your account looking like spendable money. They aren’t yours. When GST falls due on the 28th, or an instalment of provisional tax on 28 August, 15 January or 7 May, the cash has to be there.
How to find it: total the GST, PAYE and next provisional tax instalment you owe, and subtract that from your bank balance. What remains is the cash you actually have.
How to free it: open a separate tax account and move the amounts across weekly. See the GST return crunch for how it plays out.
5. Owner drawings and personal costs
Drawings and shareholder salaries don’t appear as business expenses in the same way as wages. A year of generous drawings can drain cash even when the business looks healthy on paper.
How to find it: total what you took out over twelve months and compare it with profit after tax.
How to free it: set a regular, planned drawing figure and review it each quarter. If you’ve been propping up the household from the business, the account will tell you.
Not sure where your cash has gone? Start the 60-second enquiry and we’ll look at the numbers with you.
6. Equipment and fit-out spending
A new van, a coffee machine or a fit-out is spent in cash immediately but written off against profit slowly through depreciation. The profit figure barely flinches while the bank balance takes the hit.
How to find it: list capital purchases from the past year and add them up.
How to free it: next time, match the funding to the life of the asset. A repayment spread over several years keeps working capital free. Our equipment and fit-out pages explain the options.
7. Prepayments and deposits
Annual insurance, vehicle registration, software subscriptions, rental bonds and supplier deposits are paid upfront but spread across the year in your accounts. They sit in the balance sheet as an asset, invisible in the bank.
How to find it: look at the prepayments line on your balance sheet.
How to free it: where you can, switch annual payments to monthly, and ask whether deposits can be reduced as your track record builds.
Putting numbers on it
Illustrative only. A Dunedin joinery firm reports $120k profit. Its cash position tells a different story:
| Item | Effect on cash |
|---|---|
| Profit for the year | +$120,000 |
| Debtors up | −$55,000 |
| Stock up | −$20,000 |
| Loan principal repaid | −$35,000 |
| New machinery bought | −$40,000 |
| Owner drawings above salary | −$25,000 |
| Change in cash | −$55,000 |
Profit says a good year. Cash says the account is $55,000 lower. Nothing here is a mistake. It’s just timing, and it needs managing.
What to do next
- Pull your aged debtors, stock list, loan schedule and tax balances.
- Fill in a table like the one above for the last twelve months.
- Find your largest line, because that’s where the biggest gain is.
- Build a twelve-week forecast with our cash gap guide.
- Fix the leaks you can, and fund the gaps you can’t.
Make it a monthly review
Set aside an hour each month to compare profit with the change in your bank balance, and list the three biggest reasons they differ. Over a few months a pattern emerges: perhaps debtors keep growing, or stock keeps rising. Once you know your pattern, you can fix the biggest cause first, rather than guessing at remedies.
When funding helps
Once you’ve tightened what you can, a remaining gap is a timing problem rather than a profit problem, and that’s what working capital finance exists for. A working capital loan or standby line bridges the stretch until debtors pay and stock sells, and you repay it as the cash comes back. The aim is to borrow precisely the size of the hole, not a number that happens to be on offer.
What to take to your accountant
Bring a short list rather than a vague worry. Share your aged debtors, stock list, loan schedule, tax balances and the last twelve months of drawings, and ask three questions: where did last year’s profit go, which item is the biggest cash drain, and what change would release the most money in the next quarter. A good accountant can answer all three in an hour. Pair that conversation with a twelve-week forecast and you will know whether your gap is temporary timing or something deeper that needs structural change.
Check in with someone who looks at this daily
If you suspect a profitable business is being starved of cash, ask us. The enquiry takes about a minute, there’s no credit check to ask, and your details stay with one team. A real person looks at your numbers and calls you.
Please be accurate with turnover, debtors and commitments, since that is how we size the cover to your real gap.
Frequently asked questions
How can I be profitable and still short of cash?
Because profit records income and costs when they happen, while cash records when money moves. A large sale you haven't been paid for lifts profit today and lifts the bank balance only when the customer pays.
What's the quickest way to free up cash?
Usually collecting overdue invoices and tightening terms, followed by clearing slow-moving stock. Both turn assets you've already paid for back into money.
Is a growing business more likely to run short?
Often, yes. Growth means buying more stock and carrying more unpaid invoices before the extra cash arrives, so fast-growing businesses can feel the pinch hardest.
When does borrowing make sense?
When the cash is tied up for a known, limited time and a clear event, such as a customer payment, releases it. Borrowing to cover a business that loses money every month rarely helps.