The accountant says the business made a profit.
Turnover:
$8.8 million.
Operating profit:
approximately $940,000.
The business has plenty of work.
Customers are paying.
Employees are busy.
Yet the business owes the ATO:
$410,000.
The owner looks at the financial statements and asks:
“If we’re making nearly a million dollars, where is the money?”
That’s one of the most important questions a business owner can ask.
Because:
profit is not the same thing as cash.
A profitable business can still experience severe cashflow pressure.
And if you don’t understand why the cash disappeared, arranging finance to clear the ATO debt may only solve the problem temporarily.
Before we talk about borrowing:
let’s find the missing cash.
The Phillip Business
Imagine an established commercial services and contracting business operating from Phillip and servicing customers across Canberra and surrounding regions.
Trading history:
16 years.
Annual turnover:
approximately $8.8 million.
Employees:
36.
Operating profit:
approximately $940,000.
ATO debt:
$410,000.
The business has:
vehicles,
equipment,
commercial customers,
government-related contracts,
and a strong forward work schedule.
It doesn’t look like a failing business.
It isn’t.
But it has a cash problem.
Start With the $940,000 Profit
The owner sees:
$940,000
and thinks:
“We should have $940,000 in the bank.”
Not necessarily.
Profit is an accounting measure of business performance over a period.
Cash moves differently.
Money can be tied up in:
debtors,
inventory,
equipment,
loan repayments,
tax,
business growth,
and owner withdrawals.
That’s why we need to follow the cash.
First Place to Look: Customers Who Haven’t Paid Yet
At the end of the financial year, the business has:
$1.75 million
in accounts receivable.
That’s money customers owe the business.
It may be recognised as revenue.
But it isn’t all sitting in the bank.
Imagine $600,000 of That Is More Than 45 Days Old
The business has completed the work.
Employees have been paid.
Suppliers have been paid.
Vehicles have been fuelled.
The customer hasn’t paid yet.
The profit may exist.
The cash doesn’t.
This Is the Profit-Cash Gap
Suppose the business invoices:
$750,000
during a strong month.
Great month.
But only:
$430,000
is actually collected from customers during that month.
Meanwhile the business pays:
wages,
suppliers,
finance,
insurance,
rent,
and tax obligations.
Revenue is strong.
Bank balance can still fall.
Second Place to Look: Growth
Three years ago the Phillip business turned over:
$5.9 million.
Today:
$8.8 million.
That’s nearly:
$3 million
of additional annual revenue.
Sounds excellent.
But how was that growth funded?
Growth Needed More Employees
Employees increased from:
24
to:
36.
Twelve additional employees.
Suppose the average total weekly employment cost across those positions is approximately:
$1,850 per employee.
That’s:
$22,200 per week
of additional employment cost.
Before the customers pay.
Growth Needed More Vehicles
The business added:
six vehicles.
Some were financed.
Two were purchased from cash.
Cash used:
approximately $165,000.
The vehicles may be productive assets.
But:
$165,000
left the bank account.
Growth Needed Equipment
Additional equipment purchased over two years:
approximately $280,000.
Of that:
$170,000
was paid from business cash.
Again:
the business owns the equipment.
The money hasn’t vanished.
It changed form.
Cash became:
assets.
Asset-Rich Doesn’t Mean Cash-Rich
The balance sheet may show:
vehicles,
equipment,
stock,
and debtors.
The owner may genuinely have a valuable business.
But Friday payroll doesn’t accept:
“We own a $120,000 machine.”
It needs cash.
Third Place to Look: Inventory
Suppose the business previously carried:
$240,000
of stock.
Today:
$510,000.
That’s another:
$270,000
tied up in the business.
Some of that stock may be essential.
But the cash used to purchase it isn’t sitting in the bank anymore.
Now the Missing Cash Starts to Appear
Increase in inventory:
approximately $270,000
Equipment purchased from cash:
$170,000
Vehicles purchased from cash:
$165,000.
That’s already:
$605,000
of cash absorbed by business assets.
And we haven’t touched debtors yet.
Fourth Place to Look: Debtor Days
Three years ago customers paid in:
approximately 31 days.
Today:
average payment time is:
49 days.
That’s an extra:
18 days
of revenue sitting outside the business.
On:
$8.8 million
of annual turnover, that can represent a substantial working-capital shift.
Roughly How Much?
Average daily turnover:
approximately $24,100.
An additional:
18 days
of revenue outstanding equates to roughly:
$434,000
of extra sales sitting in the debtor cycle at any point, using a simple turnover-based illustration.
That isn’t a precise working-capital calculation.
But it shows the scale of the issue.
Customers Taking 18 Days Longer Can Consume Hundreds of Thousands in Cash
The business didn’t necessarily lose the money.
It is waiting for it.
Meanwhile:
employees don’t wait.
Suppliers don’t necessarily wait.
Fuel doesn’t wait.
Finance repayments don’t wait.
And tax obligations don’t simply disappear because customers pay slowly.
Fifth Place to Look: Loan Principal
This catches people.
Suppose the business pays:
$28,000 per month
across various vehicle and equipment facilities.
Not all of that payment is necessarily treated as an expense in the same way for accounting profit.
Cash still leaves the bank.
Over twelve months:
$336,000
of cash may leave through those repayments.
The exact accounting and tax treatment depends on the facility and circumstances, so discuss that with the accountant.
From a cashflow perspective, however:
the bank account still sees the payment.
Sixth Place to Look: Owner Drawings and Distributions
This can be uncomfortable.
But we need to look.
Suppose the owners have withdrawn:
$240,000
from the business during the year through salaries, drawings, distributions or other owner-related payments.
I’m not saying that amount is inappropriate.
The owners need to be paid.
But cash withdrawn is no longer available to fund:
working capital
or
tax.
“The Business Made $940,000” Doesn’t Mean the Owners Can Take $940,000
The business may need a substantial proportion of its earnings retained to fund:
growth,
debtors,
inventory,
equipment,
and tax obligations.
A growing business can require more retained cash than a stable one.
Seventh Place to Look: One Large Customer
The Phillip business has a customer representing:
approximately 22%
of annual revenue.
That customer changes payment terms from:
30 days
to:
60 days.
Annual revenue from that customer:
approximately $1.94 million.
One month’s revenue from that customer is roughly:
$162,000.
That change alone can create a significant cashflow gap.
The Business Can Be Profitable and Still Be Funding Its Customer
The business performs the work.
Pays its employees.
Pays suppliers.
Then waits:
60 days
to get paid.
Effectively:
the business is funding part of the customer’s payment cycle.
Eighth Place to Look: Tax Was Used as Working Capital
This is where the ATO debt may actually have come from.
Cash became tight.
The owner had:
payroll Friday,
supplier Monday,
ATO obligation Tuesday.
The owner chose:
payroll.
Then:
suppliers.
The tax payment was deferred.
The owner intended to catch up next month.
Next Month Didn’t Fix It
Another customer paid late.
Another equipment repair occurred.
Another payroll was due.
The business remained profitable.
But the tax arrears accumulated.
Eventually:
ATO debt:
$410,000.
In Effect, the ATO Became a Working-Capital Source
Not because the owner planned it that way.
But because money that should have met tax obligations remained inside the operating business.
That’s a warning sign.
The business may have a structural working-capital requirement that has never been properly funded.
Clearing $410,000 Doesn’t Fix That Requirement
Suppose Thrive arranges finance and:
ATO before settlement:
$410,000
ATO after settlement:
$0.
Excellent.
Six months later:
customers still take 49 days.
Inventory is still $510,000.
Growth continues.
Working capital remains tight.
What happens?
The business may start falling behind again.
That’s the Outcome We Need to Prevent
ATO refinance:
$410,000
New ATO debt twelve months later:
$180,000.
Now the business owes:
the new lender
and
the ATO.
That’s worse than where we started.
Find the Structural Cash Requirement
How much cash does this business actually need to operate comfortably?
Perhaps:
minimum operating cash reserve:
$500,000.
But the business usually operates with:
$120,000 to $200,000.
Then it has been undercapitalised for its current size.
The Business May Have Outgrown Its Original Cash Position
At:
$3 million turnover,
a certain cash reserve may have been adequate.
At:
$8.8 million,
it may not be.
Larger payroll.
Larger suppliers.
Larger debtors.
Larger tax obligations.
Larger unexpected expenses.
Growth changes the working-capital requirement.
Profitability Doesn’t Protect You From Undercapitalisation
A profitable business can grow faster than its cash resources.
This is sometimes called:
overtrading.
The business has work.
It has profit.
It simply doesn’t have enough cash available at the right time to fund the volume of activity.
So Is the Answer ATO Debt Finance?
Maybe partly.
But I’d want to investigate the broader problem.
The business might need:
a refinance of historical ATO debt,
working-capital finance,
debtor finance,
better customer collection,
less inventory,
different asset-finance practices,
or
a combination.
Don’t Borrow $410,000 Before Asking Whether You Actually Need $650,000
This sounds backwards.
Why borrow more?
I’m not saying the business should.
I’m saying:
work out the actual requirement.
Perhaps:
ATO debt:
$410,000
plus
minimum working-capital shortfall:
$240,000.
If we only solve the:
$410,000
historical debt
and ignore the:
$240,000
structural cash gap,
the business could end up back in trouble.
Equally, Don’t Borrow $650,000 If You Can Fix $240,000 Operationally
Maybe:
$100,000
can be released by reducing excess inventory.
Maybe:
$80,000
can be released through improved debtor collection.
Maybe:
future equipment can be financed instead of bought from cash.
Now the additional working-capital requirement may be much smaller.
Finance Is One Lever
Operational improvements are another.
The strongest solution may use both.
Look at the Debtor Ledger
Who owes the:
$1.75 million?
How old are the invoices?
Are there:
disputes?
concentrations?
slow customers?
retentions?
unbilled work?
A debtor ledger can tell us far more than:
“Customers owe us a lot of money.”
Suppose $900,000 Is Owed by Three Customers
Now concentration matters.
If one customer delays payment, the business can experience a substantial cash shock.
That may explain why the tax position became unstable.
Could Invoice Finance Help?
Potentially, depending on:
debtor quality,
customer mix,
invoice terms,
and lender requirements.
Invoice finance can provide access to part of eligible receivables before customers pay.
But it isn’t automatically the answer.
The cost and structure need to make commercial sense.
What About an Overdraft or Working-Capital Facility?
Potentially another option depending on the business and lender.
A revolving facility may help manage timing differences between:
cash out
and
cash in.
Again:
the business needs the right facility for the actual cashflow problem.
What About Property-Secured Finance?
If property is available, it may potentially help restructure historical ATO debt.
But property doesn’t solve:
49-day debtors.
It doesn’t solve:
excess stock.
It doesn’t solve:
poor cash forecasting.
Those still need attention.
What About Unsecured Finance?
Potentially.
But if the business uses short-term unsecured finance to clear:
$410,000
and the repayment is aggressive, it could create another cashflow squeeze.
The finance needs to fit the business’s actual cash-generation cycle.
What About Equipment Finance?
This business made a mistake by purchasing:
$335,000
of vehicles and equipment from cash.
Not because paying cash is always wrong.
But because the business needed that cash elsewhere.
Future productive assets may be better financed over an appropriate period rather than consuming working capital upfront, depending on the circumstances.
“Debt-Free” Isn’t Always the Same as Financially Strong
A business owner may proudly say:
“I don’t like finance. I buy everything cash.”
Meanwhile:
ATO debt:
$410,000.
If buying assets from cash contributed to the tax shortfall, the business wasn’t truly operating debt-free.
It effectively substituted:
formal asset finance
with
unpaid tax.
That may not be the better structure.
What If the Business Has $500,000 in ATO Debt?
Same diagnostic process.
Don’t immediately ask:
“Which lender will refinance $500,000?”
Ask:
“Where did the $500,000 go?”
Maybe:
inventory.
Debtors.
Assets.
Growth.
Losses.
Owner withdrawals.
Or a combination.
What If the Business Is Actually Losing Money?
Then the answer changes.
If the accountant’s latest figures show:
operating losses,
finance may not solve the underlying problem.
Appropriate accounting, restructuring or insolvency advice may be needed depending on the circumstances.
But Our Phillip Business Is Profitable
That’s what makes the case interesting.
The problem isn’t:
“The business doesn’t work.”
The problem is:
“The business’s cash structure hasn’t kept pace with its growth.”
That’s potentially fixable.
But only if management understands it.
Build a Cashflow Bridge
Start with:
opening cash.
Then show:
cash generated from operations,
customer receipts,
inventory purchases,
equipment purchases,
loan repayments,
tax payments,
owner withdrawals,
and other major movements.
Finish with:
closing cash.
Now the owner can see where the profit went.
Ask the Accountant to Help Explain It
Your accountant can help reconcile:
accounting profit
with
cash movement.
This can be extremely useful before taking on more finance.
A broker should understand the finance requirement.
The accountant should provide guidance on the financial and tax reporting.
Then Build the Finance Strategy
Maybe the answer becomes:
ATO refinance:
$410,000
plus
a separate working-capital facility.
Or:
ATO refinance only,
combined with stronger debtor management.
Or:
partial cash contribution,
partial finance,
and reduced inventory.
Or:
keep the ATO arrangement
and establish a working-capital facility.
There isn’t one automatic answer.
What Does Success Look Like?
Twelve months later:
ATO historical debt:
resolved or materially reduced
Current tax:
up to date
Debtor days:
49 reduced to 38
Inventory:
$510,000 reduced to $420,000
Operating cash reserve:
maintained above target
Business:
still profitable.
That’s a structural improvement.
What Does Failure Look Like?
Historical ATO debt:
refinanced.
New lender:
owed $410,000.
New ATO debt:
$190,000.
Debtor days:
still 49.
Inventory:
now $600,000.
Cash:
tight.
That’s not a finance success.
Thirty Years in Finance Has Taught Me to Ask Where the Money Went
A profitable business with ATO debt isn’t necessarily a contradiction.
The money is usually somewhere.
It may be:
sitting with customers,
sitting on a shelf,
sitting in machinery,
used to fund growth,
used to repay principal,
or already withdrawn.
Find it.
Then decide what finance is actually required.
If Your Business Is Profitable but Owes the ATO, Start With These Numbers
Tell Thrive Broking:
current ATO balance,
annual turnover,
approximate profitability,
how long the business has traded,
whether current tax obligations are being maintained,
whether there is an ATO payment arrangement,
existing business debt,
and what you believe caused the tax debt.
Then look at:
current cash,
total debtors,
average customer payment time,
inventory,
recent equipment purchases,
and major owner withdrawals or distributions where relevant.
If the business has grown rapidly, tell us:
turnover three years ago
and
turnover today.
That can help us understand whether working capital has kept pace with growth.
Because:
“We’re profitable”
is good information.
But if the business owes:
$410,000
to the ATO,
we still need to answer:
“Where did the cash go?”
Once we understand that, we can investigate whether finance can help solve the actual problem rather than simply moving the tax debt somewhere else.