Profit Is Up but Cash Is Down: Build a Cash Bridge
A business can report a profit while its bank balance falls because sales, expenses and payments happen at different times. Build a cash bridge from the month's profit, adjusting for unpaid invoices, stock, supplier balances and non-cash costs, then add investing and financing movements. The result should explain the change between your opening and closing bank balances.
What you’ll get from this guide: For owners comparing their reports with the bank: finish with a cash movement you can trace, rather than an unexplained difference.
Gather reports covering the same month
Use an accrual profit and loss report, opening and closing balance sheets, and reconciled bank statements. Include the same business accounts at both dates. Transfers between those accounts cancel out; a transfer to another account you own hasn't reduced total business cash.
Keep a working column for the source of each adjustment. Receivables come from customer balances; inventory from the stock report; principal repayments from the loan statement. If you need an unexplained balancing figure, leave the difference visible and investigate it.
Follow a profitable month into the bank
Assumptions: AUD. Simplified accrual example: no GST, income tax, asset disposals, new borrowing, bad debts or other balance changes. All inventory changes are purchases/sales; depreciation is the only non-cash expense. Opening cash is $18,000.
| Adjustment | Cash effect | Running bridge |
|---|---|---|
| Reported net profit | $12,000 | $12,000 |
| Add depreciation | $2,000 | $14,000 |
| Increase in receivables | −$9,000 | $5,000 |
| Increase in inventory | −$6,000 | −$1,000 |
| Increase in trade payables | $4,000 | $3,000 |
| Equipment paid for | −$3,000 | $0 |
| Loan principal repaid | −$1,000 | −$1,000 |
| Owner withdrawal | −$1,000 | −$2,000 |
Original ASBG worked example. All businesses, amounts and scenarios are fictional. The table contains the same figures as the visual.
Opening cash of $18,000 minus the $2,000 movement gives closing cash of $16,000. That is the bank figure to reconcile. The business earned a profit, but customers and shelves absorbed cash before the equipment, loan and owner payments.
The $4,000 payable increase adds back costs represented by unpaid supplier balances. It doesn't mean those bills have disappeared. They become a future cash commitment.
Get the signs right
An increase in customer balances usually reduces cash relative to accrued sales; a decrease releases it. Inventory increases also absorb cash. An increase in unpaid supplier balances has the opposite effect. This simplified method assumes no write-offs, revaluations, foreign exchange changes or reclassifications within those balances. If any occurred, isolate them first.
Add back depreciation because it reduced profit without being a payment this month. Subtract the actual equipment payment separately. Loan interest already included in profit mustn't be subtracted again; principal is the separate financing movement.
Xero's explanation of indirect cash forecasting describes the starting point: net income adjusted for non-cash items and working-capital movements. Our numbers above are an original illustration, not an exported accounting report.
If your bridge doesn't agree
Check cash and accrual report settings, opening dates and unreconciled bank entries first. Then look for prepayments, accrued costs, customer deposits, GST and income-tax balances, loans and owner contributions. Actual businesses need those extra lines when the balances move. Don't combine GST-inclusive debtors with GST-exclusive sales and assume the difference is missing cash.
Give your accountant the bridge and the reports if a balance has mixed movements you can't separate. For companies, the legal and tax character of payments to owners also needs checking; this example doesn't classify them.
Turn the finding into a next step
If unpaid sales explain the difference, check the invoice-level collection dates. If stock is the cause, use the slow-moving inventory worksheet. Then move from explaining last month to forecasting the next 13 weeks.
Key takeaways
- Match the report period and bank-account scope before calculating.
- Trace every adjustment to a report or statement.
- A cash bridge explains past movement; it doesn't establish that future bills are affordable.
Where to get help
Ask your accountant to reconcile unusual balance-sheet movements. Bring both balance sheets, the profit report, bank reconciliations and your unfinished bridge.
Where to go from here
Cash Forecast vs Actual: Find What Went Wrong
Use actual bank movements to improve the next forecast.
3 min readFind Cash Tied Up in Slow-Moving Inventory
Identify stock that could release cash and prevent a repeat.
3 min readPut Your Sales Pipeline into a Cash Forecast
Continue the “see the gap” reading sequence.
3 min read
General information only. This guide doesn't take your personal or business circumstances into account and isn't financial, legal or tax advice. Rates and thresholds change — check the official sources linked in this guide and get qualified advice where your circumstances require it.