Quick answer
A business can be profitable and still short of cash because profit is counted when you earn and spend, while cash moves when money actually changes hands. Cash commonly hides in unpaid invoices, stock, loan principal repayments, equipment bought outright, tax set aside or owed, owner drawings and prepaid bills. Finding which ones apply tells you whether to fix timing, spending or funding.
Key points
- Profit and cash measure different things at different times.
- Debtors and stock are the two biggest hiding places for most small businesses.
- Loan principal and equipment purchases use cash but don't show as expenses in the P&L.
- GST and PAYG collected aren't your money, even while they sit in your account.
- A cash flow statement shows where profit went.
The accountant says you made a solid profit last year. The bank account says you can barely cover next week’s payroll. Both are telling the truth. They’re just measuring different things.
Profit is a scorecard: did you earn more than it cost to earn it? Cash is oxygen: is there money in the account right now? A business can score well and still struggle to breathe. Here are the seven places cash most often hides in Australian small businesses, how to spot each one, and what to do about it.
Why profit and cash drift apart
Your profit and loss statement records a sale when you earn it, usually when you invoice. It records a cost when you incur it. Cash only moves when someone actually pays.
So if you invoice $50k in June but the customer pays in August, June’s profit includes $50k that won’t be in your account for two months. Multiply that across every customer, every stock order and every loan repayment, and the gap between profit and cash can become large.
The good news: once you know where the money is hiding, you can usually get some of it back, or at least plan around it.
1. Unpaid invoices (debtors)
What happens: Every invoice you’ve sent but haven’t been paid for is profit you’ve recorded and cash you don’t have.
How to check: Run an aged debtors report. Look at the total, and at how much is past due.
How big it can get: If you invoice $80k a month and customers take 50 days to pay on average, you could have well over $100k sitting with customers at any time.
What to do: Invoice the day work is done, ask for deposits, shorten terms for new customers and follow up on a schedule. Our guide to getting invoices paid faster covers it step by step.
2. Stock on the shelf
What happens: Stock you’ve paid for but not sold is cash turned into boxes. The P&L only records it as a cost when it’s sold.
How to check: Look at stock on hand in your accounting or inventory system, and identify slow-moving lines.
What to do: business.gov.au suggests avoiding holding too much stock, clearing items that won’t sell and buying closer to when customers order. Fund stock deliberately, with repayments matched to when it sells. See cash for stock.
3. Loan principal repayments
What happens: When you repay a loan, only the interest is an expense in your P&L. The principal part comes straight out of your bank account but never reduces reported profit.
How to check: Add up the principal portion of all loan and finance repayments over the year. For many businesses with vehicle, equipment or business loans, it’s a surprisingly large number.
What to do: Make sure repayment terms suit your cash flow, not just your accountant’s balance sheet. If you’ve financed long-lived assets over very short terms, repayments may be squeezing cash unnecessarily.
4. Equipment and assets bought outright
What happens: Buy a $40k ute or machine for cash and $40k leaves the account on the day. The P&L spreads the cost over several years as depreciation, so profit barely moves.
How to check: Look at fixed asset purchases in the last 12 months.
What to do: Consider whether some assets should be financed or leased so the cash outflow is spread over the asset’s useful life. business.gov.au’s cash flow tips include leasing or hiring equipment you only need occasionally.
5. Tax: set aside, owed, or paid in advance
What happens: Three tax-related things pull cash away from profit:
- GST and PAYG withheld sit in your account between collection and the BAS due date. They feel like your money but aren’t.
- Income tax on last year’s profit is paid this year, often when cash is already tight.
- PAYG instalments prepay tax on this year’s profit.
How to check: Look at your ATO statement of account and your BAS history.
What to do: Move GST and PAYG to a separate account every week. If you’re already behind, deal with it early: since 1 July 2025, the ATO’s general interest charge isn’t tax deductible, so tax debt costs more than it used to. Our page on cash to clear an ATO debt explains the options.
Profit on paper, nothing in the bank? Start a 60-second enquiry and we’ll help you work out whether it’s a timing gap we can bridge.
6. Owner drawings
What happens: Money you take out for yourself, beyond a set wage, comes straight from cash. In many structures it isn’t an expense in the business P&L.
How to check: Add up all transfers to personal accounts over the last 12 months. Compare with the profit.
What to do: Set a regular, sustainable drawing amount. If drawings regularly exceed what the business generates in cash, the business will always feel short no matter how profitable it is.
7. Prepaid bills and deposits
What happens: Annual insurance, registrations, software subscriptions paid upfront and bonds on premises all leave the account in one hit. The P&L spreads them over the period they cover.
How to check: List every annual or upfront payment in the last year.
What to do: Spread renewal dates, consider monthly instalments where the cost is reasonable, and set aside a weekly amount for annual bills. See cash for annual bills.
Putting it together: a simple reconciliation
You don’t need to be an accountant to see where profit went. Most accounting software produces a cash flow statement. If yours doesn’t, this rough version works:
| Item | Effect on cash |
|---|---|
| Net profit for the year | Starting point |
| Plus depreciation | Added back (no cash left) |
| Minus increase in debtors | Cash tied up with customers |
| Minus increase in stock | Cash on shelves |
| Plus increase in creditors | Cash you’re holding from suppliers |
| Minus loan principal repaid | Cash out, not in P&L |
| Minus assets bought | Cash out, spread in P&L |
| Minus owner drawings | Cash out |
| Minus tax paid | Cash out |
| Change in bank balance | Where you ended up |
When you fill it in, one or two lines usually stand out. That’s where your cash went.
Timing problem or something deeper?
Once you’ve found the hiding places, sort them into two groups.
Timing problems (cash will come back):
- debtors growing with sales
- stock built up ahead of a season
- tax due on a strong year
These are the kinds of gaps business cash is designed for. A working capital loan or cash line bridges the timing while the profit turns into cash. Our growth cash gap page explains why growing businesses feel this most.
Structural problems (cash won’t come back on its own):
- drawings higher than the business can sustain
- assets financed over terms too short for their life
- margins too thin to cover overheads and tax
These need a change in how the business runs. Borrowing to cover them only delays the reckoning. Talk to your accountant first.
Worked example
Illustrative only. A Melbourne wholesale bakery reports a profit of $210k for the year, yet starts the new year with less in the bank than twelve months earlier. Working through the seven hiding places:
- debtors grew by $65k as two cafés moved to 30-day accounts
- a new oven and van cost $90k, paid in cash
- loan principal repayments totalled $38k
- an income tax bill of $48k was paid in the same year
- drawings were in line with the business
That accounts for most of the profit. The business isn’t in trouble; it’s grown and invested. The owners arrange a modest cash line to cover the debtor timing and refinance the oven over a longer term to ease monthly cash.
Turning your profit back into breathing room
If you’ve worked through this list and found that your money is tied up in timing (customers who’ll pay, stock that’ll sell, a tax bill from a good year), you’re in a strong position to bridge it. That’s exactly the kind of situation we deal with every day.
Tell us what you’ve found. The enquiry takes about a minute and won’t affect your credit score. Your details stay with one team rather than being blasted out to a pile of lenders, and a real person looks at your numbers and calls you.
Please fill in turnover and the amount you think you need as accurately as you can. Good numbers mean we can match you to the right option without a second round of questions.
Frequently asked questions
How can my business make a profit but have no money?
Profit counts sales when you earn them and costs when you incur them. Cash counts money when it actually moves. If customers haven't paid, stock is on the shelf, or cash went to loan principal, equipment or tax, profit can be healthy while the bank account is empty.
Does loan principal show up as an expense?
No. Interest is an expense on the profit and loss statement, but the principal part of a loan repayment isn't. It still leaves your bank account, which is why loan repayments can drain cash without reducing reported profit.
What report shows where my cash went?
A cash flow statement, which most accounting software can produce. It reconciles profit with the change in your bank balance by showing movements in debtors, stock, creditors, loans, assets and drawings.
Should I borrow if I'm profitable but short of cash?
It can make sense when the shortage is a timing issue, such as growth or slow payers, and the profit will turn into cash. If cash is short because of drawings or overspending, fix those first.
Can a profitable business still have a tax problem?
Yes. Profit creates tax, but if that profit is tied up in debtors or stock, the cash to pay the tax may not be there when it's due. That's a common cause of ATO debt in growing businesses.