Quick answer
Profit measures whether sales exceed costs over a period; cash flow measures when money actually enters and leaves the bank. A New Zealand business can be profitable and short of cash because customers pay later than costs fall due, stock soaks up money before it sells, GST and provisional tax arrive in lumps, and loan principal and owner drawings never appear in the profit figure at all.
Key points
- Profit counts sales when earned; the bank only sees them when customers pay.
- Stock, debtors, tax payments, loan principal and drawings all use cash without reducing profit.
- Fast growth often widens the gap, because costs are paid before bigger sales are collected.
- A short-range cash forecast shows the gap weeks before the bank balance does.
Every year, owners look at a healthy profit figure from their accountant and wonder why the business account never seems to have any money in it. It’s one of the most common confusions in small business, and it isn’t a sign of bad management. Profit and cash simply measure different things, on different calendars.
What’s the difference between profit and cash flow?
Profit answers the question “did we earn more than it cost us to earn it?” over a period. Sales are counted when they’re earned, and costs when they’re incurred, regardless of when money moves.
Cash flow answers “how much money came into the bank, and how much went out, and when?” It cares only about timing.
Most of the time the two travel in the same direction. The trouble is in the gap between them, and in a growing business that gap can be tens of thousands of dollars.
Where does the cash go if the profit is there?
| Cash drain | Shows in profit? | Why it hurts cash |
|---|---|---|
| Customers paying on account | Yes, as sales | You’ve paid wages and materials, but the money arrives weeks later |
| Stock on the shelf | No, until sold | Cash is spent upfront and only returns when stock sells |
| GST | No | Collected money sits in your account, then leaves in a lump |
| Provisional and terminal tax | Only as tax expense | Paid in instalments on fixed dates, sometimes for two years at once |
| Loan principal | No | Every repayment’s principal uses cash with no expense |
| Owner drawings | No (for sole traders) | Cash leaves; profit is unchanged |
| Equipment purchases | Only as depreciation, spread over years | Full price leaves the bank on day one |
Look down that list and the mystery clears up. A business can report $150,000 of profit while its bank balance falls, because customers owe it more, its shelves hold more, and it has paid off part of a loan and bought a new vehicle.
A worked example: profitable but tight
Illustrative example. A Wellington commercial cleaning company finishes the year with $140,000 of profit. Over the same year:
- It won two large building contracts on 20th-of-the-month terms, so debtors rose by $55,000.
- It bought two vans for $90,000 in total, paid in cash.
- It repaid $24,000 of loan principal.
- The owners drew $70,000.
- It paid the previous year’s terminal tax plus this year’s provisional tax, a combined $48,000.
That’s $287,000 of cash out against $140,000 of profit. Even with depreciation added back (say $18,000), the bank balance falls by about $129,000. The business is healthy; it just used cash faster than it earned it.
Why does growth make it worse?
Growth is the most common reason profitable businesses run short. Each new customer or contract means paying wages, materials and subcontractors before collecting a cent. If the new work is on 30 or 60-day terms, you’re financing your customers for a month or two. And because provisional tax on the standard option is based on last year, a strong year produces a catch-up bill the year after, just when the growth needs funding.
Our feature Why growth eats cash works through this in detail, including how to work out how much working capital each extra dollar of sales needs.
How do you close the gap between profit and cash?
Shorten the time customers take to pay. Clear terms, prompt invoicing and a polite, persistent chase. Our page on payment terms and the 20th of the month covers the New Zealand conventions.
Hold less stock, or pay for it later. Every week a product sits on the shelf is cash you can’t use. See stock and supplier terms.
Separate tax money. Put GST and provisional tax into a separate account every week so tax dates don’t drain the operating account. The GST & provisional tax set-aside planner works out the amounts.
Match funding to the asset. Paying cash for a van that will work for seven years uses working capital meant for wages and stock. Spreading the cost over the asset’s life keeps cash for day-to-day trading.
Hold a reserve. A cash buffer of several weeks’ outgoings turns a late payment from a crisis into an inconvenience. How big should your cash reserve be? helps you set a target.
How do you see a shortfall coming?
Forecast cash, not profit. A rolling 8 to 13-week forecast lists expected receipts (by when customers actually pay, not when you invoice) and every payment, including GST, provisional tax, PAYE and loan repayments. business.govt.nz suggests building pessimistic, realistic and optimistic versions, and that habit is worth adopting: the pessimistic version shows how much buffer you really need.
If the forecast shows a dip below your comfortable minimum, you’ve found the problem weeks early, which is when there are the most options. One of them may be a working capital facility arranged before it’s urgent; you can check what you could qualify for in about a minute.
When the answer is working capital
Sometimes the analysis shows nothing is wrong except timing: the business is growing, customers are good for the money, and the gap will close on its own if the business can carry it. That’s exactly what working capital funding is for. We look at unsecured options for trading businesses and loans secured on residential or commercial property. There’s no credit check when you first enquire, your details stay with our team rather than being sent out to other lenders, and a real person reads what you write. Please answer the questions accurately so we can be specific on the first call. See if you qualify.
Frequently asked questions
Can a business be profitable and still go broke?
Yes. If cash goes out faster than it comes in for long enough, a business can't pay its bills on time even though the profit and loss shows a profit. Slow-paying customers, excess stock and lumpy tax bills are the usual causes.
Why doesn't loan repayment show in my profit and loss?
Only the interest part of a loan repayment is an expense. The principal reduces a liability on the balance sheet, so it uses cash without reducing profit.
Is GST part of my profit?
No. GST you collect belongs to Inland Revenue and isn't income, and GST you pay on purchases isn't an expense if you can claim it. But it moves through your bank account, so it affects cash flow.
What's the quickest way to see a cash gap coming?
Keep a rolling forecast of cash in and cash out for the next 8 to 13 weeks, including GST, provisional tax, wages and loan repayments. Update it weekly with actual figures.