Why Profitable Businessess Still Run Out Of Cash (And how to avoid it)

Profitable but cash-strapped? Learn why and the practical steps to protect your cashflow before problems start.

We've discussed this one before. But it is still one of the main reasons business owners are losing sleep at night.

One of the biggest surprises for growing businesses is discovering that profit and cash are not the same thing. You can have strong sales, healthy margins, and still find yourself struggling to make payroll. Usually two miss out on getting paid: the IRD or the business owner.

So why does this happen? — and more importantly, what to do about it?

Profit vs Cash: The Key Difference

Profit is an accounting measure; Cash is what actually pays the bills.

Your profit and loss statement shows whether your business is theoretically profitable. Your bank balance shows whether you can survive the next 30 days.

The gap between the two is where cashflow problems live.

This theoretical profit is the one done for your end of year taxes, it includes all those people who might still owe you money.

The Most Common Reasons Profitable Businesses Run Out of Cash

1. Customers Take Too Long to Pay

You’ve done the work. You’ve issued the invoice. The theoretical profit is recorded.

But the cash? Still sitting in your customer’s bank account.

This is one of the biggest pressure points for NZ SMEs. When debtor days creep out, your business ends up funding your customers.

Watch for:

• Debtors steadily increasing

• More clients paying late

• Cash getting tighter despite steady sales

What helps:

• Clear payment terms

• Prompt invoicing

• Consistent follow-up

• Progress payments for larger jobs

Small improvements here can have a big impact on cash. Offering the ability to pay by credit card (xero is your friend here); if they have a large debt encourage smaller weekly payments to keep on top of it; use debt collection agencies

2. Growth Eats Cash

Growth is exciting — but it’s also hungry.

When your business grows, you often need to:

• Buy more stock

• Hire staff before revenue fully lands

• Invest in systems or equipment

• Extend more credit to customers

All of this uses cash before the extra profit fully shows up. Equipment especially, the cash leaves your bank account to pay for it, but you are only reducing your profit by the depreciation on that equipment (if it's over $1000). Smart growing business will leverage finance to fund fixed assets. Yes you willl pay interest (tax deductible) but it smooths the cashflow rather than a big lump of cash leaving your account.

3. Stock Is Tying Up Money

If you carry inventory, cash can quietly pile up on your shelves.

Profit looks fine because the stock is recorded as an asset. But the bank account tells a different story — the cash has already gone out the door.

Common signs:

• Slow-moving or obsolete stock

• Overstocking “just in case”

• Margins look healthy but cash feels tight

Good stock management is often one of the quickest cashflow wins. Use consignment stock where you can.

4. Debt and Asset Purchases

Yes I said above that using loans to finance assets can smooth cashflow. But you still need to be able to service those loans. The interest is tax deductible (reducing that theoretical profit), the loan balance payment is not (reduces cash in the bank). There is good debt and bad debt, and pays to have a discussion with your accountant before taking it on.

5. Tax Surprises

Tax is one of the most common cashflow shocks we see. The current tax debt with IRD is staggering. Because income tax and provisional tax are paid on theoretical profit, cash poor businesses are soon stretched. Even more so if the profit starts to drop while you have provisional tax to pay.

Common issues:

• No tax provisioning during the year

• Rapid profit growth triggering higher provisional tax (the year after you become a provisional tax payer you have two years of tax to pay: the one just gone and the one you are in). This can be a problem if the next year ends up not as good and cashflows reduce.

• Forgetting GST isn’t your money

This one is very avoidable with forward planning. For all of our clients who we file their GST returns we do tax planning in line with the GST return - any large variations from your provisional tax and we start having conversations. We offer this service to all our clients who file their own GST as well, it's not a special club or anything. There are some excellent choices for funding tax cashflows.

6. Drawings That Are Too High

Personal drawings can quietly drain cash.

The business may be profitable on paper, but if cash is being pulled out faster than it’s being generated, pressure builds quickly. Personal expenses on business credit cards especially, these small amounts build up but it doesn't feel like you have taken any cash out the business.

This isn’t about not paying yourself properly — it’s about making sure drawings are aligned with real cash capacity.

How to Stay Ahead of Cashflow Pressure

The business owners that sleep well at night usually have a few things in place:

✔ Regular cashflow forecasting

Even a simple 90-day forecast gives early warning.

✔ Active debtor management

Cashflow improves fastest when invoices are collected faster.

✔ Tax provisioning built into pricing

ie, your price has to reflect that you will pay tax on the net profit which some business owners forget. No surprises at provisional tax time.

✔ Visibility over stock levels

for product-based businesses.

✔ A buffer (when possible)

Cash reserves buy breathing room.

The Bottom Line

Profit is important — but cash keeps the doors open.

Most cashflow problems don’t appear overnight. They build gradually as timing gaps widen between money coming in and money going out.

The good news? With the right visibility and a few practical controls, they’re usually very manageable.

If your business is profitable but cash feels tighter than it should, it may be time for a proper cashflow review.

Contact Gillian if any of this rings true for you, and lets discuss how we can help build you a healthy bank account balance.

Cashflow Help Here