Cash vs Profit: Why They’re Not the Same
Have you ever sat in a meeting with your accountant where they congratulate you on making a healthy profit - yet you’re still wondering how you’ll cover payroll next week?
If that sounds familiar, you’re not alone. This is one of the most common frustrations we hear from business owners in Nelson and beyond.
The reality is simple: cash is not the same as profit. Understanding the difference is essential for anyone serious about growing their business sustainably. As experts in small business accounting, our team of Nelson accountants explains why profit and cash flow don’t always line up - and what you can do about it.
Why cash and profit don’t match
Even if your profit and loss statement looks great, your bank balance might tell a different story. Here are the main reasons why:
1. Tax payments don’t happen at the same time as profit
Even if your profit is shown after tax, the timing of tax payments rarely matches the accounting period. You might be due a refund, or you could owe more than expected — either way, this affects your cash, not your reported profit.
2. Asset purchases reduce cash, not profit
Buying equipment, vehicles, or other assets reduces your cash flow, but they’re not treated as expenses. Instead, they’re recorded on your balance sheet, so they don’t reduce your profit for the year.
3. Asset sales boost cash without increasing profit
When you sell a business asset, the cash comes in — but it’s not treated as income in your profit and loss statement. It simply reduces the value of your assets on the balance sheet.
4. Owner’s drawings are not business expenses
The money you take out of the business to live on comes from your equity, not from profit. Your living costs don’t reduce your profit, but they definitely reduce your cash.
5. Debtors: invoiced ≠ paid
Your profit includes sales you’ve invoiced — even if your customers haven’t paid yet. If debtors are slow to pay, your cash suffers while costs still need to be covered. The good news: collecting outstanding invoices faster improves cash flow without increasing your tax bill.
6. Stock and work in progress tie up cash
Your profit only includes stock that’s been sold or used. If you’re holding extra stock, you’ve spent the cash but haven’t increased profit - at least, not yet.
7. Creditors can delay cash outflow
Expenses are recorded when they’re incurred, not when they’re paid. So if you haven’t paid a supplier yet, your cash balance might be higher than expected — but that’s temporary. Paying late isn’t a sustainable cash flow strategy.
8. Loan repayments reduce cash, not profit
Repaying the principal on a loan doesn’t count as an expense, so it doesn’t affect profit. But it does reduce your cash reserves.
9. Depreciation reduces profit without touching cash
Depreciation spreads the cost of assets over their useful life. It appears as an expense in your profit and loss, reducing profit, but it doesn’t impact cash flow at all.
Why this matters for your business
Understanding the difference between cash and profit is crucial to financial health. You can be profitable on paper but still face cash flow problems that threaten your business. That’s why effective small business accounting focuses not just on profit, but also on cash flow forecasting and management.
At GoAccounting, our team of expert Nelson accountants helps local businesses get a clear picture of where their money is going, why profit and cash don’t always match, and how to improve both.
Your next step? Talk to a Nelson accountant today
If you’re scratching your head about where your money has gone despite showing a profit, we’re here to help. Book a consultation with our Nelson accountants today, and we’ll walk you through your financial statements, explain the cash vs. profit difference for your business, and create a strategy to strengthen your cash flow.
Let’s go!