Help & support
- Profits and cash aren’t the same: businesses can be profitable on paper but still struggle to pay bills.
- Timing matters: cash flow depends on when money moves in and out, not just overall profit.
- A weekly cash-flow tracker is a simple way to stay ahead and avoid nasty surprises.
Q: What is cash flow, and why is it important for businesses?
A: Cash flow is the movement of money in and out of your business. It includes payments received from customers (inflows) and expenses like wages, bills, and supplier payments (outflows). Positive cash flow ensures you can pay bills on time, plan for growth, and maintain financial stability.
Understanding the movement of your money can make all the difference to the future success of your business.
You’ve landed a massive account, those orders are rolling in and your profit-and-loss statement has never looked better. So why are you staring at your bank account, wondering how you’ll make payroll this week? Now could be the time to ask yourself one simple question: “What is cash flow?”
Tess McCormack at CommBank Business Bank has some welcome strategies on how to define cash flow in business.
Q: Tess, why can a business show a healthy profit on paper but still run out of cash?
A: A lot of businesses are what we call cash-flow negative. This essentially means that in order to do a piece of work for a customer, they have to spend on stock, wages and supplies before they’re actually making any cash.
On paper you’ve made a profit but you still need to find a way to cover expenses. Think of a café. The till looks healthy but suppliers want payment upfront, wages are due and catering clients might not pay invoices for weeks. Suddenly, there’s no cash to pay bills.
Q: Why do business owners often confuse accounting profit vs cash flow?
A: It’s often one of those life lessons that one has to experience to understand but profit is essentially income minus your expenses. Cash flow is about timing: when the money actually enters or leaves your account. So this is really a case of “How do I actually get through those times when there’s less cash coming in?”
Q: What are the warning signs that cash flow is getting tight?
A: When you’re constantly overdrawing your account, worrying about how you’re going to cover wages and falling behind on making payments on basic expenses. They’re the key things we see from customers when they’re starting to get into a little bit of trouble.
Q: Why is it so important to understand the difference between accounting profit vs cash flow in business?
A: If you don’t manage cash flow proactively, it can add a huge amount of mental load and stress to a business owner and take them away from the day-to-day running of their business. But once you understand the difference, you can plan ahead and focus on growth rather than scrambling to keep up.
Q: How can business owners stay on top of cash flow?
A: Sit down and forecast what’s coming in and going out over the next couple of weeks. The CommBank app is fantastic and makes it easy to identify regular expenses and average income coming in. If you can see a shortfall ahead, you’ll have time to explore solutions to manage your cash-flow situation before it becomes urgent.
Quick tip: Set up a weekly cash-flow tracker
How to accurately define profit in business? Forget relying on your bank balance as your own health check. Jot down inflows (customer payments) and outflows (expenses) for the next three to six months. You’ll quickly see whether you’re heading for a shortfall, allowing you to take action early.
Congratulations, you’ve completed this lesson!
Next lesson: 2.1 - Business Cash Flow: 6 Ways to Speed Up Invoice Payments
Disclaimer: The information on this page is solely for educational purposes. It has been prepared without considering your objectives, financial situation or needs, you should, before acting on the information, consider its appropriateness to your circumstances and if necessary seek the appropriate professional advice. Any opinions, conclusions or recommendations are reasonably held or made, based on the information available at the time of publication, but no representation or warranty, either expressed or implied, is made or provided as to the accuracy, reliability or completeness of any statement made. The CommBank app is free to download however your mobile network provider charges you for accessing data on your phone. The CommBank app is available on Android and iOS operating systems (minimum operating system version requirements may apply). Learn more at commbank.com.au/app.