Your accountant delivered the profit and loss statement last week. Your business is profitable.

So where’s the cash? You look at your account balance, and it tells a different story.

The account is way too thin. Your overdraft is creeping, again, towards the limit. So: how can we be profitable and still be broke?

The answer is in how profit gets measured versus how cash actually moves.

Your accountant counts profit the moment you write the invoice. You finish the contract and invoice the client, standard operating procedure, and the profit shows on your P&L and balance sheet. Done.

But when your client doesn’t pay until 30 days from end of month (your payment terms, not theirs), you’re in a cash hole.

For 2 months, you don’t have their cash. You paid your employees, their superannuation, your suppliers, the ATO, and your administration expenses.

With what?

Your accountant isn’t pulling a swifty. They’re doing everything according to Australian Accounting Standards.

The profit is real eventually, but the cash hole is right now. Today.

The receivables problem

Let’s say you have five clients who owe you money. One owes $50,000 and won’t pay for ninety days.

Your P&L recognised that revenue the moment you delivered the work. You’re showing $50,000 as an asset, in accounts receivable. But it’s not cash in your account. You’re profitable on paper but there’s no cash to pay the bills.

The profit is real. It’s not the problem. The problem is the timing.

Most businesses don’t think about this until that big nasty ‘oops’ moment. A client takes up to 60 days to pay. If you have a few of these, your working capital is gone.

The capacity trap

You pay for capacity up front. You pay practitioner salaries, administrative staff, and software seats.

The moment you start working to deliver a product, the cost hits your P&L. But the cash to support that capacity won’t arrive until you get paid.

In a manufacturing business, your unsold inventory and partly-completed work-in-progress may be accounted for as assets. But there’s no cash until you find a buyer and deliver.

In a service business, it’s unbilled hours and unused capacity. And unlike manufacturing, unbilled hours can’t be stockpiled.

In either case your P&L and balance sheet look fine because you measure cost against completed work, not upfront outlay. What doesn’t look so good is your cash position.

The timing mismatch

You booked a project in month 1, and straight away costs start piling up. Wages, raw materials, buy-ins, contractors, license fees.

You record the revenue (in accounts receivable) when it’s delivered and invoiced in month 2. That’s standard accounting practice.

You get paid in month 4 because that’s in your terms of sale, 30 days from end-of-month.

Boom, you finally have the cash! But the costs have been accumulating since you booked the project, 3 months ago.

This is the crux. The timing is mismatched across the whole cycle. Costs, cash and profits just don’t line up.

Extend this across dozens of transactions and the gap becomes catastrophic. Your P&L shows healthy margins while your cash disappears.

Yes, it matters

Lack of cash kills more businesses than lack of profitability. You can be profitable for years and still go under because you run out of cash.

I’ve seen this happen way too many times.

The fix is to calculate your cash conversion cycle: the number of days between when cash leaves your account to support a project, and when the client’s money hits your bank account.

Most owners don’t know this number. It varies, as you’d expect, according to the business you’re in. For online sales, for example, it’s less of a problem because customers pay on order placement. But if you’re a civil works business building a motorway, it’s something that gets monitored every day.

Work backwards. Tighten receivables. Shift to point-of-sale payments or upfront retainers. Eliminate unbilled lag time. Take deposits. Adjustments like this will keep you in business.

Your profit number is useful, but cash is what matters.