Why profitable businesses still run out of cash

A business can be profitable on every measure and still be unable to pay wages. It happens often enough that it has a name — overtrading — and it is almost never caused by the thing the owner blames. It is caused by timing, and timing is visible months in advance to anyone looking at a forecast rather than a profit and loss.

Profit and cash measure different things

A profit and loss statement records revenue when you invoice and expenses when you incur them. Cash moves when money actually changes hands. Between those two facts sits every reason a profitable business runs dry.

Four items appear in cash and never in profit. Loan principal repayments are a cash outflow but not an expense. Capital purchases are an outflow, but only the depreciation appears as an expense. Stock is bought with cash and only becomes an expense when it sells. And tax instalments are paid on a schedule that has nothing to do with when you earned the profit.

Two more appear in profit and not in cash: depreciation, which is an expense with no outflow, and revenue invoiced but not yet collected.

The working capital trap

Growth consumes cash before it produces it. This is the mechanism that catches most businesses, and it gets worse the faster you grow.

Consider a business winning a large new client. Stock or labour is paid for in month one. The work is delivered in month two and invoiced. Payment arrives, on 30-day terms, in month three or four. Meanwhile wages, rent and suppliers have all been paid on time.

Every additional dollar of sales requires cash up front and returns it later. A business growing 40% a year on 45-day debtor terms can be highly profitable and structurally short of money for as long as the growth continues. The only ways out are funding the gap, shortening the cycle, or slowing down.

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Overtrading is not a profitability problem. It is a funding problem produced by success, and it gets worse the better the business does.

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Tax arrives in lumps

The third pressure is the ATO. GST is collected throughout the quarter and paid at the end of it. PAYG instalments are based on prior-year income and take no notice of this year's cash. Superannuation is due quarterly today and moves to payday timing from 1 July 2026, removing a buffer many businesses have quietly been relying on.

For a business that has grown, the first year's income tax bill and the following year's instalments can fall in the same period. That combination — one year's tax plus the next year's instalments — is a common failure point for otherwise healthy businesses in year two of strong growth.

The fix is provisioning. Move GST and tax into a separate account as it accrues rather than treating the operating balance as available. It is not clever, but it works.

Three habits that prevent it

Forecast cash weekly, twelve months out. Not profit. Opening balance, receipts, payments, closing balance, by week for the next quarter and by month beyond it. Roll it forward each month so the horizon stays at twelve months instead of shrinking toward year-end.

Provision tax and super as they accrue. A separate account, funded weekly. When the BAS arrives the money is already there and the decision has already been made.

Measure the cash conversion cycle. Days to sell stock, plus days to collect from customers, minus days to pay suppliers. That number is how many days of trading you fund yourself. Watch it monthly. If it lengthens while sales grow, the pressure is building whatever the profit line says.

What to do when it is already tight

Start with debtors. Not a generic reminder — call the largest three, find out whether there is a dispute or an approvals problem, and agree a date. A single conversation frequently outperforms a month of automated statements.

Then talk to suppliers before you miss a payment rather than after, and to the ATO before a lodgement is late rather than after. Payment plans are considerably easier to obtain while your lodgements are up to date, which is why lodging on time matters even when you cannot pay.

Then look at pricing, because a business that cannot fund its own growth at current margins does not have a cash problem. It has a pricing problem that cash flow is reporting.

The point of forecasting

A forecast does not create money. It creates time. Six weeks of warning turns a crisis into a decision — about a facility, a payment plan, a price rise or a slower growth rate. Six days of warning turns it into whatever you can manage on the day.