Many small business owners look at their profit and loss report and feel the business is doing well. Then they check the bank account and wonder where the money has gone.
This is one of the most common small business problems: profit does not always mean cash.
Profit is an accounting result. Cash flow is the actual movement of money in and out of the bank account. A business can be profitable but still struggle if customers pay late, too much cash is tied up in stock, GST has not been set aside, loan repayments are high, or tax obligations arrive before the business is ready.
Cash flow management is about making sure the business has enough money available when payments fall due. These payments may include wages, rent, suppliers, loans, GST, PAYG withholding, superannuation and the owner's own drawings.
Common cash flow pressure points
Common cash flow pressure points include:
- Customers paying slowly while staff and suppliers must be paid on time.
- Treating sales income as profit without allowing for GST and costs.
- Holding too much stock.
- Taking money out of the business too early.
- Forgetting to set aside BAS, income tax or super payments.
- Not preparing for seasonal slow periods.
Building cash flow habits
Cash flow management does not need to be complicated, but it does need to be consistent.
Step 1: Build a simple forecast
Start with a simple cash flow forecast. List expected money in and expected money out for the next 4 to 12 weeks. This helps you see whether a shortage is likely before it becomes urgent.
Step 2: Set aside GST and PAYG
Set aside GST and PAYG withholding separately. GST collected from customers is not business profit. PAYG withholding is also money collected on behalf of the tax system. Using these amounts for day-to-day spending can create problems later.
Step 3: Chase payments early
Follow up customer payments promptly. Clear payment terms should be included in quotes, contracts and invoices. If a customer is late, have a process for reminders and follow-up.
Step 4: Control stock and big spends
Control stock and major spending. Buying inventory, equipment, fit-out or advertising may be good for the business, but timing matters. A profitable decision can still create cash stress if the payment is due long before the return comes in.
Finally, separate owner drawings from business profit. This is especially important for companies and trusts, where money taken by the owner may need proper accounting and tax treatment.
Cash flow should be reviewed when the business is healthy, not only when it is under pressure. A strong business is not just one with profit on paper. It is one that can pay its bills on time.
If your business seems profitable but cash is always tight, a cash flow and tax payment review can help identify where the pressure is coming from.
