Published: April 2026
You are sitting with your accountant. They have just told you the business made $500,000 profit last year. You should feel great.
But you are looking at your bank balance: $12,000. You cannot reconcile these two facts. You made half a million dollars. Where is it?
Your accountant starts talking about accruals, depreciation, and working capital. Your eyes glaze over. You leave the meeting more confused than when you walked in.
If you do not already check these regularly, start with the 5 numbers that tell you if your business is slowly going broke. That article gives you the warning signs. This one shows you exactly where the money goes.
Here is the explanation in plain English, using a single worked example.
A Sydney-based construction and maintenance business. 22 employees. Revenue of $4 million. The profit and loss for the financial year says net profit of $500,000.
At the start of the year, the business had $180,000 in the bank. At the end of the year, it has $12,000. The business "made" $500,000 but the bank balance dropped by $168,000.
Here is exactly where the money went.
Start with profit: $500,000
This is the number from the profit and loss. But the P&L follows accounting rules, not cash rules. Several things that consumed cash are not on the P&L, and several things on the P&L did not involve cash.
The business owns vehicles and equipment. Depreciation is an expense on the P&L but no cash left the building. The cash left when you bought the asset, which might have been three years ago. Depreciation is an accounting entry that spreads the cost over the asset's useful life.
Running total: $500,000 + $65,000 = $565,000 available
At the start of the year, clients owed the business $330,000. At the end of the year, clients owed $450,000. That $120,000 increase is revenue the P&L counted as income, but the cash has not arrived.
Why did receivables increase? The business grew 12% during the year. More revenue means more invoices outstanding. They also took on a large commercial client who negotiates 60-day payment terms instead of the usual 30. Revenue looked great. Cash was lagging behind.
Running total: $565,000 - $120,000 = $445,000
The business stocks materials for maintenance contracts. To support the growth, stock holdings increased from $95,000 to $140,000. That $45,000 in extra stock sitting in the warehouse is cash that has been spent but will not hit the P&L until the materials are used on a job.
Running total: $445,000 - $45,000 = $400,000
Company income tax at 25% on $500,000 profit is $125,000. Plus the GST timing difference of about $10,000 (GST collected exceeded GST paid during the year because of growth). That $135,000 went straight to the ATO.
Running total: $400,000 - $135,000 = $265,000
The business has a vehicle fleet financed through chattel mortgages and an equipment loan. Total principal repayments during the year: $72,000. Only the interest portion ($18,000) appeared on the P&L. The $72,000 in principal repayment reduced the bank balance but is not an expense on the profit and loss.
Running total: $265,000 - $72,000 = $193,000
A new service vehicle was purchased mid-year for $55,000 cash. This does not appear on the P&L as an expense. It appears on the balance sheet as an asset and will depreciate over 5 to 8 years. But the cash is gone now.
Running total: $193,000 - $55,000 = $138,000
The two directors drew a combined salary of $150,000 plus dividends of $30,000 during the year. Owner remuneration through a company structure appears partly on the P&L (salary as an expense) and partly below the line (dividends from profit). The total cash drawn by the owners was $180,000.
Running total: $138,000 - $180,000 = -$42,000
The business was behind on super contributions at the start of the year. They caught up during the year, paying $15,000 more in super than what was expensed in the current year P&L.
Running total: -$42,000 - $15,000 = -$57,000
The business owed suppliers $25,000 more at year-end than at the start of the year. This means they consumed $25,000 worth of goods and services that they had not yet paid for. The expense is on the P&L, but the cash has not left yet.
Running total: -$57,000 + $25,000 = -$32,000
Cash movement for the year: negative $32,000.
But the bank dropped by $168,000 ($180,000 to $12,000). The extra $136,000 difference comes from the fact that $136,000 of last year's end-of-year cash was spoken for by liabilities that had not yet been paid: previous year's tax, super catch-up, and year-end supplier payments that landed in July.
In short, the business started the year with $180,000 in the bank, but roughly $136,000 of that already belonged to the ATO, super funds, and suppliers. The real available cash at the start of the year was closer to $44,000. Subtract the $32,000 net cash outflow, and you land at $12,000.
Profit per P&L: $500,000
➕ Depreciation (non-cash expense): +$65,000
➖ Receivables increase (earned but not collected): -$120,000
➖ Inventory increase (bought but not used): -$45,000
➖ Tax payments: -$135,000
➖ Loan principal repayments: -$72,000
➖ Vehicle purchase: -$55,000
➖ Owner drawings: -$180,000
➖ Super catch-up: -$15,000
➕ Supplier payment timing: +$25,000
Net cash movement: -$32,000
Real starting cash (after liabilities): $44,000
Ending cash: $12,000 ✓
Every dollar is accounted for. Nobody stole anything. The business genuinely made $500,000 in profit. It also genuinely consumed $532,000 in cash for things the P&L either ignores or treats differently from reality.
The $120,000 increase in receivables is the biggest single cash drain. If the business had maintained 30-day debtor days instead of letting the new commercial client push to 60 days, approximately $60,000 to $80,000 more cash would have been available.
Faster invoicing, stricter terms, and weekly collections follow-up are free to implement. Invoice on delivery or completion, not at month end. Chase at day 7, not day 45. Require deposits on large jobs. These changes cost nothing and can release tens of thousands in trapped cash.
For a practical framework, read our debtor management strategies guide.
Having $136,000 in year-start cash that was already owed to the ATO and super funds is a trap. A separate bank account holding tax and super provisions would have made the real cash position visible from day one. The owners would have known they had $44,000 available, not $180,000.
The rule is simple: every time revenue hits the main account, immediately transfer the estimated GST (roughly 1/11th of GST-inclusive revenue), PAYG, and super into a separate account. Do not touch that account for operations. This single action prevents more cash crises than any other.
From 1 July 2025, interest on ATO debt is no longer tax-deductible. The current GIC rate is 10.96% for Q4 FY26, compounding daily. Carrying ATO debt as a cash management strategy has never been more expensive.
Buying a $55,000 vehicle with cash during a year of growth placed additional strain on working capital. Financing the purchase, even at a modest interest rate of 6 to 8%, would have preserved cash for operations. The monthly repayment on a 4-year chattel mortgage at 7% would be approximately $1,315 per month, or $15,780 per year, leaving $39,220 in the bank to cover operating needs.
When your business is growing and working capital is already under pressure, financing assets is almost always better than paying cash. The interest cost is tax-deductible and predictable. The working capital crunch from a $55,000 lump sum payment is neither.
This week: Open a separate bank account for tax provisions. Start transferring GST, PAYG, and super amounts the day revenue hits the main account. This makes the real cash position visible immediately.
This month: Run the debtor ageing report and personally call every client with a balance over 30 days. Negotiate the 60-day payment terms on the large commercial client back to 30 days, or at minimum require a 50% deposit on future work. Review whether the $45,000 increase in stock is justified or whether ordering patterns can be tightened.
This quarter: Build a 13-week rolling cash flow forecast to see problems before they arrive. Our cash flow forecasting guide walks through the process. Have an honest conversation about owner drawings: at $180,000 combined against $500,000 profit, the drawings are within profit, but only after you strip out all the non-P&L cash outflows that are consuming the rest. The real question is whether $180,000 in drawings is sustainable given the business's true cash generation, not its accounting profit.
Book a free 15-minute cash flow review with Scale Suite
For the five numbers you should be checking every month to avoid this situation, read our guide on the 5 numbers that tell you if your business is slowly going broke.
Why does Xero show profit but my bank is empty?
Because Xero's profit and loss follows accrual accounting rules, not cash rules. Revenue is counted when invoiced, not when paid. Expenses are counted when incurred, not when the money leaves your account. And several major cash outflows, including loan repayments, asset purchases, owner drawings (dividends), and tax payments, do not appear on the P&L at all. The cash flow statement in Xero reconciles the two, but most business owners never look at it.
Is it normal for profit and cash to be this far apart?
Yes, especially for growing businesses. Growth consumes cash because you need to fund increased receivables, inventory, and staffing before the associated revenue converts to cash. A 12% revenue increase with 60-day payment terms can easily trap $100,000+ in additional working capital. The gap between profit and cash is always present; the question is whether you understand it and manage it. Our guide on why revenue growth worsens cash flow explains this dynamic in detail.
What is a healthy cash buffer for my business?
A general rule is 3 months of fixed costs. For a business like our example with approximately $250,000 in monthly fixed costs (wages, rent, insurance, loan repayments), a healthy buffer is $750,000. Having $12,000 is dangerously low. Use our cash runway calculator to see where you stand.
Should I set up a separate bank account for tax?
Yes. This single action prevents more cash crises than any other. Every time revenue arrives, immediately transfer the estimated GST (roughly 1/11th of GST-inclusive revenue) and PAYG/super provisions into a separate account. Do not touch that account for operations. If you had done this from day one, you would never mistake the ATO's money for your operating cash.
My profit is lower than this example and I still have no cash. Is there any hope?
The dynamics are the same at every scale. A business making $100,000 profit can have zero cash for the same reasons: growth consuming working capital, loan repayments, tax timing, and owner drawings. The fix is the same: manage debtor days, provision for tax, and match your drawings to what the business can genuinely sustain. Start with the 5 numbers check to see where the biggest problem is.
How do I read the cash flow statement in Xero?
In Xero, go to Accounting, then Reports, then Statement of Cash Flows. The report has three sections. Operating activities shows cash generated by the business (adjusting profit for receivables, payables, and other working capital changes). Investing activities shows cash spent on or received from assets. Financing activities shows loan drawdowns and repayments, plus owner contributions and drawings. The net of all three equals your change in bank balance. If operating cash flow is negative while profit is positive, your working capital is consuming more cash than the business generates.
Can a profitable business actually go bankrupt?
Yes, and it happens regularly. Insolvency is a cash problem, not a profit problem. A business is insolvent when it cannot pay its debts as they fall due. Our example business is technically profitable but has $12,000 in the bank against $117,000 in looming tax and super obligations (using the figures from our 5 numbers article). If BAS is due next week, it cannot pay without either collecting debts urgently, borrowing, or entering an ATO payment plan.
What is the single most important thing I can do to fix this?
Shorten your debtor days. It is free, it is immediate, and it releases cash that is already yours. Invoice on delivery rather than at month end. Follow up at 7 days, not 45. Require deposits on large jobs. A business that reduces average debtor days from 45 to 30 on $4 million revenue frees up roughly $165,000 in cash, permanently. No extra sales required.
How do I prevent this from happening again?
Check your cash position weekly. Run a 13-week rolling cash flow forecast. Maintain a separate tax account. Review debtor ageing every Monday. Compare your owner drawings to genuine cash profit (not accounting profit) every quarter. These five habits take less than an hour per week combined and will prevent 90% of the cash surprises that catch business owners off guard.
I am growing fast. Should I stop growing to preserve cash?
Not necessarily. But you need to fund the growth properly. If organic cash generation cannot keep up, arrange a working capital facility (overdraft, invoice finance, or line of credit) before you need it. Financing growth is not a sign of weakness. It is a recognition that working capital consumption during growth often exceeds the pace of cash generation. Our article on why revenue growth worsens cash flow covers this in depth.
Scale Suite is a Sydney-based provider of outsourced finance teams and fractional CFO services for Australian SMEs. We deliver weekly bookkeeping, payroll, BAS/IAS lodgement, cashflow reporting, management accounts, and strategic fractional CFO oversight, all as a fully embedded team that works inside your business.
CA-qualified, Xero Certified, and registered BAS Agents, we replace fragmented bookkeepers and once-a-year accountants with one responsive finance function at a fraction of the cost of full-time hires. We serve growing businesses across Sydney, Melbourne, Brisbane, and Perth, with packages starting from $1,500 per month and no lock-in contracts.
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We review and check this guide periodically. At the time of writing (April 2026), all information was current. Scale Suite is a registered BAS Agent, not a licensed tax advisor or financial advisor. This content is general information only and does not constitute professional tax, financial, or legal advice. Some details may change over time.
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Scale Suite is a Sydney-based provider of outsourced finance and HR services for Australian SMEs. We deliver bookkeeping, financial reporting, payroll processing, fractional CFO support, recruitment, employee onboarding, people and culture support, and fractional HR oversight, all as a fully embedded team that works inside your business.
Employment Hero Gold Partner, CA-qualified, and Xero Certified, we replace fragmented finance and HR processes with one responsive, senior-level function at a fraction of the cost of full-time hires. We serve growing businesses across Sydney, Melbourne, Brisbane, and Perth, with packages starting from $1,500 per month and no lock-in contracts.
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