Profit Is Not Cash – Why Your Surplus Can Still Leave You Short
Why trustees need to read the accounts and the bank balance together, not one or the other.
A body corporate can show a healthy surplus in its financial statements and still be unable to pay its suppliers next month. That is not a contradiction. The accounts and the bank balance measure two different things, and trustees who watch only one of them are flying with half their instruments switched off.
Two different measures
Accrual accounting records income when it is earned and expenses when they are incurred, regardless of when money changes hands. Cash flow tracks what actually goes into and out of the bank account.
Because of this timing difference, the surplus in the accounts and the cash in the bank rarely match. Levies may be raised but not yet collected, and expenses may be incurred but not yet paid. In a tight month, that gap can turn a paper surplus into a real cash shortfall.
Where are the gaps?
- Uncollected Levies: The income statement counts levies raised, not levies paid. Arrears look like income, but you cannot pay a contractor with an outstanding levy.
- Accrued Expenses: Invoices that have been recognised but not paid make the bank balance look better than it is. The money is already spoken for.
- Prepayments: Cash may have left the bank for insurance or services that will only show as an expense in later months.
- Restricted Funds: Money set aside for the reserve fund, provisions or special projects sits in the bank but is not available for day-to-day running costs.
The danger of trusting one number
| If you rely only on… | The risk… |
|---|---|
| The accounting surplus | You believe the community scheme is healthy while cash runs short. |
| The bank balance | You overlook unpaid invoices, accrued expenses and ring-fenced reserves. |
| Cash flow alone | You miss a structural deficit, growing arrears or costs incurred but not yet paid. |
What to look at instead
Sound financial management means reading three reports together, every month:
- Income Statement: Are we operating within budget, and running a surplus or a deficit?
- Bank and Cash Reconciliation: How much cash do we actually hold, and how much of it is free to use after reserves and commitments?
- Cash Flow Forecast: Will there be enough cash to meet upcoming payments.
Tie them together by reconciling accruals against actual cash movements and outstanding liabilities. That is where the surprises surface early, while there is still time to act.
The Bottom Line: Accounting tells you how the community scheme is performing; cash flow tells you whether it can pay its bills when they fall due. Neither gives you the full picture on its own.
