Cash Flow vs Profit: Why Both Matter

Understanding the difference between cash flow and profit is essential for small businesses in Australia. Many business owners assume that profitability guarantees financial stability, but without proper cash flow management, even profitable businesses can struggle to meet financial obligations.

This article explains cash flow vs profit, why both are important for business sustainability and how Australian small businesses can effectively manage them. We’ll also cover bookkeeping, accounting, and tax compliance in line with Australian laws to help you make informed financial decisions.

Let’s Get Straight to the Point

For those short on time, here’s a quick breakdown:

• Profit is the amount left after all business expenses have been deducted from revenue.
• Cash flow tracks the actual movement of money in and out of a business.
• A business can be profitable but still have cash flow problems if payments are delayed or expenses are too high.
• Managing cash flow and profit together is vital for business survival and long-term growth.
• Small businesses in Australia must track both metrics to comply with tax laws, avoid financial stress, and plan for expansion.

What Is Profit?

Profit represents a business's financial success. It is calculated by subtracting total expenses from total revenue.

There are three main types of profit:

1. Gross Profit – The amount left after subtracting direct costs like materials and labour from total revenue.
2. Operating Profit – Gross profit minus operational costs like rent, wages, and administrative expenses.
3. Net Profit – The final amount left after all business expenses, taxes, and interest are deducted.

Profitability is important because it shows whether a business is sustainable in the long term. However, it does not indicate whether a company has enough cash to meet short-term obligations.

How Profit Affects Taxes in Australia

Australian businesses must comply with the latest tax regulations, which include:

• Corporate tax rates:
  • 25% for small businesses with an annual turnover below $50 million.
  • 30% for larger companies exceeding this threshold.
• GST (Goods and Services Tax) obligations: Any business earning over $75,000 per year must register for GST and charge 10% on goods and services.
• Payroll tax: Different states have different thresholds. In NSW, businesses with wages exceeding $1.2 million annually must pay payroll tax.

Common Profit Pitfalls

Many small business owners overestimate profitability, leading to financial stress. Common mistakes include:

• Ignoring operating costs: Some businesses focus only on revenue while neglecting overhead costs like rent and salaries.
• Forgetting about tax obligations: Many businesses fail to set aside funds for tax, leading to large, unexpected tax bills.
• Undervaluing inventory costs: Retail and manufacturing businesses often underestimate the stock cost, leading to lower profit margins.

What is Cash Flow, and Why Does It Matter?

Cash flow measures how money moves in and out of a business over time. A business can be profitable on paper but still run out of cash if it has more money going out than coming in.

Unlike profit, cash flow includes:

• Accounts receivable: Unpaid invoices from customers.
• Loan repayments: Money going out for debt obligations.
• Non-cash expenses: Depreciation is deducted from profit but does not affect cash flow.

Cash Flow vs Profit: The Key Differences

The Risk of Poor Cash Flow

A business can generate high sales but fail due to poor cash management. Cash flow shortages may cause:

• Missed payroll: Employees may not get paid on time.
• Supplier disputes: Businesses unable to pay invoices on time may face delays in stock deliveries.
• Late tax payments: The ATO charges penalties for overdue tax obligations.

Why Small Businesses Struggle with Cash Flow

1. Delayed Receivables

Australian businesses commonly offer 30, 60, or even 90-day payment terms. While this helps secure contracts, it can restrict cash flow, leaving businesses unable to pay their expenses.

Solution:

• Implement automated invoicing systems.
• Offer discounts for early payments.
• Request partial upfront payments to cover costs.

2. High Operating Costs

Small businesses often face unexpected expenses, from rent increases to higher material costs.

Solution:

• Negotiate better supplier terms.
• Reduce non-essential costs like office perks.
• Use financial forecasting to predict future expenses.

3. Over-Reliance on Loans

Loans provide a temporary cash boost, but high repayments can negatively impact long-term profitability.

Solution:

• Only borrow when absolutely necessary.
• Ensure repayment terms align with revenue cycles.
• Explore government grants as an alternative.

How to Track Cash Flow and Profit Effectively

1. Keep Accurate Financial Records

Proper bookkeeping and accounting ensure compliance with ATO regulations. Australian businesses must keep financial records for at least five years.

2. Use Accounting Software

Popular cloud-based platforms include:

• Xero – Designed for small businesses with automated GST tracking.
• MYOB – Ideal for payroll and employee tax compliance.
• QuickBooks – Great for cash flow forecasting.

3. Monitor Cash Flow Weekly

Regular reviews help identify shortfalls before they become major problems.

4. Plan for Taxes Early

Set aside money for:

• GST (10%).
• Income tax obligations.
• Superannuation payments for employees.

Best Practices for Managing Cash Flow and Profit Together

1. Optimise Payment Terms

• Invoice immediately after completing a service.
• Offer payment plans for high-value customers.

2. Review Expenses Regularly

• Reduce unnecessary spending.
• Renegotiate supplier contracts annually.

3. Use a Business Budget

A structured budget ensures businesses balance expenses with revenue.

4. Plan for Seasonal Changes

Many businesses experience seasonal slowdowns. Plan ahead by:

• Saving cash reserves during peak periods.
• Adjusting staffing levels to match demand.

Why Both Cash Flow and Profit Matter for Small Businesses in Australia

1. Ensuring Business Stability

A company’s stability depends on consistent cash flow, not just profit. A business may record high profits but struggle to pay essential expenses such as rent, wages, and supplier invoices.

For instance, a Sydney-based retail store might report an annual net profit of $150,000, but if most of its revenue is locked in unpaid invoices, it may not have enough cash to:

• Pay monthly rent of $5,000.
• Cover staff wages of $15,000 per month.
• Purchase new stock ahead of peak seasons.

A common mistake small businesses make is focusing too much on profit while neglecting cash flow tracking. Without enough liquidity, businesses may be forced to take out short-term loans with high interest rates, further increasing financial strain.

To prevent cash shortages, businesses should:

• Implement strict invoicing policies to encourage prompt payments.
• Maintain an emergency cash reserve to cover at least three months' expenses.
• Regularly review financial statements to monitor cash flow trends.

2. Supporting Business Growth and Expansion

A business cannot expand without strong cash flow management. Even if profits are growing, companies require consistent access to liquid funds to invest in:

• New equipment and business assets.
• Hiring and training staff to meet increased demand.
• Marketing campaigns to attract more customers.

For example, a Melbourne-based café looking to open a second location may have steady profits, but it needs sufficient cash on hand to pay for:

• A $50,000 café fit-out (e.g., furniture, coffee machines, and kitchen equipment).
• Three months' rent upfront to secure a prime location.
• Marketing costs to promote the new branch.

Without positive cash flow, this café may struggle to cover these upfront costs, delaying expansion or forcing the business to take on excessive debt.

How to prepare for growth:

• Monitor cash flow forecasts before committing to expansion.
• Set aside a percentage of monthly profits for growth investments.
• Explore government grants for small businesses, such as the New Business Assistance with NEIS program.

3. Meeting Australian Tax and Legal Obligations

One of the biggest financial challenges for small businesses is tax compliance. Businesses in Australia must set aside funds for taxes, including:

• Company tax (25% or 30%).
• GST (10%) for businesses with annual revenue over $75,000.
• PAYG withholding tax for employees.
• Superannuation contributions (currently 11% of employee earnings in 2025).

Failing to pay these obligations on time can lead to:

• Late payment penalties from the Australian Taxation Office (ATO).
• Legal action or audits that disrupt business operations.
• Loss of cash reserves, making it harder to cover operational costs.

For example, a Brisbane-based consulting firm may generate a net profit of $100,000. However, if the owner fails to set aside funds for tax obligations, the firm may owe $25,000 in taxes but lack the cash to pay them.

To stay compliant, businesses should:

• Use ATO tax calculators to estimate tax liabilities.
• Set aside a portion of income for tax payments each month.
• Use accounting software like Xero or MYOB to automatically track GST and PAYG payments.

4. Preparing for Economic Uncertainty

The Australian economy is unpredictable, with businesses often facing:

• Interest rate changes affecting loan repayments.
• Supply chain disruptions lead to increased inventory costs.
• Seasonal fluctuations impact sales in industries like tourism and retail.

Businesses that only focus on profit margins may not have enough liquidity to withstand sudden financial shocks. In contrast, companies that maintain strong cash reserves can continue operations even during difficult periods.

Example: The Retail Industry in Australia

• A fashion boutique in Perth may experience high sales during Christmas, but sales drop in January and February.
• If they fail to manage cash flow, they may struggle to pay suppliers and rent during slow months.
• Businesses with cash reserves and a strong payment strategy can survive seasonal downturns without taking on high-interest loans.

To prepare for economic uncertainty:

• Save excess cash during peak seasons to cover slow periods.
• Diversify revenue streams to reduce reliance on seasonal sales.
• Regularly review expenses to identify areas for cost-cutting.

5. Enhancing Business Credibility and Investor Confidence

Maintaining a strong cash flow position is essential for small businesses looking to secure investment or bank loans. Investors and banks assess:

• How well a business manages its cash flow before approving funding.
• Liquidity ratios indicate if a business can pay off short-term debts.
• Historical financial data, including cash flow statements and profit margins.

A profitable business with weak cash flow is a riskier investment than a company that maintains steady cash reserves.

Example: Attracting Investors
A tech startup in Sydney may have strong profit potential, but investors might be hesitant to fund the company if it lacks sufficient cash flow. Growth opportunities may be lost if the business cannot cover daily expenses.

To improve financial credibility:

• Keep accurate financial records to present to lenders and investors.
• Regularly update cash flow forecasts to plan for future investment needs.
• Maintain healthy profit margins while ensuring positive cash flow.

Conclusion

Both profit and cash flow are essential for Australian small businesses. While profit reflects financial success, cash flow ensures day-to-day survival.

To manage both effectively:

• Track income and expenses using accounting software.
• Set aside funds for tax obligations.
• Optimise payment and invoicing strategies.
• Reduce unnecessary expenses.
• Plan ahead for seasonal fluctuations.

By balancing cash flow and profit, small businesses can operate smoothly, comply with Australian tax laws, and plan for long-term success.