Why my profit and cash flow were the same!

This financial year the strangest thing happened – my profit and my cashflow increase were virtually the same!

A lot of business owners confuse profit with cashflow and actually expect to see a corresponding increase in cashflow every time they make a profit. In reality, that rarely happens. So how did I manage to achieve this near impossible feat, and – is it a good thing?

To understand the relationship between profit and cashflow you need to understand how movement in balance sheet items effect cashflow independently of profit. Most accounting systems can produce a cash flow report and this will show you exactly that – if you know how to read it.

The cashflow statement shows how the timing of payments received and made will affect your cash on hand, as well as how loans, asset purchases and other “balance sheet” items are all once piece of the “cash flow pie”.

A more realistic example of a cash flow statement is given below. This company had cash of $500 at the beginning of the period.   They made a profit of $20,000.00 for the period.

From their balance sheet, you also get the following information:

Operational items:

Balance Sheet Item:

Opening Balance at start of period

Closing Balance at end of Period



Description of Effect  Cashflow





+ $3,000.00

Adds to cashflow – you have collected more cash from debtors than was outstanding last period.





+ $150.00

Adds to cashflow – you have delayed paying out to your creditors






Reduces cashflow – you have purchased more goods than you have sold.





Increases cashflow – this one is actually an expense on your P&L but doesn’t get “paid” so doesn’t affect cashflow.

Addition to cashflow:



Their operational cashflow was therefore $20,000.00 profit, plus $1,800 from the items shown above. i.e. $21,800.00.

This operational cashflow shows how good the business is at generating cashflow from their day-to-day activities. It isn’t the end of the story however, because cashflow can also be affected by your business investments and also by financing activities.

Investments will include any equipment, assets, or securities that you purchase (reduces cashflow) or sell (increase cashflow). It can also include loans you have given out and repayments you receive back.

Financing activities include things like loans you received, your capital repayments of loans, as well as dividends or drawings made to the owners / shareholders.

So, in the example above, if the business had invested $50,000.00 in a new car and had taken out a $40,000.00 loan – then their cash flow statement might look something like this.

Cash at the beginning of the period:



Net operational cash flow for the period



Cash flow from Investment Activities



Cash flow from Financing Activities:

  •  Loan Received
  • Capital Loan Repayments
  •  Owners Drawings


  • $40,000.00
  • -$3,000.00
  • -$5,000.00

Cash at the end of the period:



As you can see – their $20K profit got gobbled up pretty quickly when they used $10K from their cash flow to purchase a car, and then paid out a further $3K in car repayments and $5K out to the owner. Luckily, they had the extra $1.8K in operational cashflow, and they still have enough in the bank to pay their outstanding creditors. Hopefully sales will continue as projected so they can keep making those car repayments!

So, back to the original question, how did I manage to “keep” all my profit??

It might be a little more obvious to you by now. I had no loans to repay, no new assets or investments, no depreciation, no dividends were paid, and I had a fairly stable level of debtors and creditors (and no inventory).

So, while this might seem like a good thing, it could indicate that the business is at the stage of its life cycle where it is a little stagnant. In my case, the business has reached a mature stage and we are in the process of saving that cashflow for some growth planning.  

And that neatly brings us to the next point – each stage in a business’s life cycle has different cash flow requirements. As business owners we need to be aware of that and plan accordingly. Think about your cash flow requirements over the next 12 months. How much will you need? How will you go about generating that cashflow? Having a plan gives you the control and the ability to make good decisions.


Stephanie Lee is a Senior Bookkeeper and co-founder of Imprest Business Services.  Stephanie is an MYOB Certified Consultant and ServiceM8 Partner.  Imprest specialise in providing tailored administrative solutions for small businesses.

Web:www.imprest.net.au  Telephone: 0424 299 882