Cash flow explained: timing, forecasting and gaps

The first lesson showed that profit isn’t cash. This lesson looks at cash itself: how it moves, how to measure it and how to see a shortfall coming before it arrives.

What cash flow is

business.gov.au defines cash flow as “the money flowing in and out of a business”.

• Cash inflows are money coming in: payments from customers, tax refunds, grants, the sale of an asset, new loans or money the owners put in.
• Cash outflows are money going out: suppliers, wages and super, rent, tax, loan repayments, equipment purchases and money the owners take out.

The basic calculation is:

• Net cash flow = cash in minus cash out
• Closing cash = opening cash plus net cash flow

If net cash flow is negative for a month, your bank balance falls. That is not always a problem, as long as you knew it was coming and have the cash to cover it.

Operating cash flow

Not all cash is the same. Accountants usually split cash flow into three groups:

• Operating: cash from running the business day to day, such as customer receipts less payments to suppliers, staff, landlords and the ATO.
• Investing: buying or selling long-term assets, such as vehicles, equipment or property.
• Financing: borrowing, repaying loans, and money the owners put in or take out.

Operating cash flow is the one to watch most closely.

• Operating cash flow = cash received from customers minus cash paid for running costs

A business with positive operating cash flow over a year is funding itself from its own trading. A business that only stays afloat through new loans or owner top-ups has a problem that more cash in the bank won’t fix.

Why timing matters

Cash problems are often about when, not how much. Common timing gaps include:

• customers who pay 30, 60 or 90 days after you invoice
• stock or materials you pay for well before you sell them
• quarterly or yearly bills, such as BAS, insurance or registration
• a large one-off purchase
• seasonal swings, where costs stay steady but sales rise and fall

business.gov.au notes that cash flow can be unpredictable, and that seasonal fluctuations and rising material costs can change the way money moves through your business. Its guidance is to plan ahead for known quiet periods.

The cash flow statement

A cash flow statement records the money that actually moved over a past period. business.gov.au says it “tracks all the money flowing in and out of your business”. Its free template follows a simple layout: opening balance, cash incoming, cash outgoing, the monthly cash balance and the closing balance.

The cash flow statement in your year-end accounts may look more formal, with the operating, investing and financing groups above. Both answer the same question: where did the cash come from and where did it go?

Forecasting cash flow

A cash flow forecast uses the same layout, but for the months ahead. business.gov.au describes it as “an estimate of your future sales and costs” that can help you understand whether you will have enough income to cover your costs.

It also separates a forecast from a budget. A budget is your plan for what you want to earn and spend over the financial year. A forecast uses your current figures and recent trends to estimate what is likely to happen next. business.gov.au suggests updating forecasts monthly or quarterly.

To build a simple forecast:

1. Start with the cash in your bank today.
2. List the cash you expect to receive each month, based on when customers actually pay, not when you invoice.
3. List every payment you expect to make each month, including tax, super, loan repayments and one-off bills.
4. Work out the closing balance for each month. It becomes the next month’s opening balance.
5. Look for any month where the balance is low or negative.
6. Compare the forecast with what actually happened each month, and adjust.

Worked example

A Sunshine Coast pool and spa supplies business has about $720,000 in yearly sales. Winter is quiet, and in late winter it buys stock for spring. The owner builds a forecast in May for June to September.

	June	July	August	September
Opening cash	$40,000	$40,000	$18,000	($7,000)
Cash from customers	$45,000	$35,000	$40,000	$70,000
Wages and super	$25,000	$25,000	$25,000	$25,000
Rent	$5,000	$5,000	$5,000	$5,000
Stock purchases	$10,000	$10,000	$30,000	$15,000
Other running costs	$5,000	$5,000	$5,000	$5,000
Quarterly BAS payment		$12,000
Total cash out	$45,000	$57,000	$65,000	$50,000
Net cash flow	$0	($22,000)	($25,000)	$20,000
Closing cash	$40,000	$18,000	($7,000)	$13,000

Figures in brackets are negative.

The business is not in trouble. Spring sales bring cash back to $13,000 by the end of September. But on these numbers it would be $7,000 short at the end of August, because the BAS payment and the spring stock order land in the two quietest months.

Because the owner can see this in May, there is time to act. Options include:

• splitting the $30,000 spring order, with $15,000 in August and another $15,000 in September
• asking the supplier for longer payment terms on the spring order
• following up overdue customer accounts before winter
• setting GST aside as it is collected, so the July BAS payment is already covered
• delaying a non-urgent purchase

Splitting the order alone would leave August’s closing cash at $8,000 and September’s still at $13,000, because $15,000 simply moves from August to September.

What cash flow may tell you

• Regular gaps at the same time each year. A seasonal pattern you can plan for. business.gov.au notes a cash flow statement can help you find payment cycles and seasonal trends.
• Customer receipts lagging behind sales. Customers may be paying more slowly. See customers paying invoices late and the lesson on debtors and creditors.
• Operating cash flow negative for months at a time. The business may be losing money, not just waiting for it. Check your profit and loss statement.
• Cash only topped up by new debt or personal money. A warning sign worth acting on early. See cash flow warning signs.

When to talk to an accountant or bookkeeper

• You want help setting up your first forecast, or linking it to your accounting software.
• Your forecast shows a gap you can’t close by changing timing.
• Tax, super or supplier payments are starting to slip.
• You are planning growth, a large contract or a big purchase and want to see the cash effect first.

Where this matters for business finance

Finance may help bridge a gap that is temporary and predictable, such as a seasonal stock build in a business that is otherwise profitable. It does not fix a business whose operating cash flow is negative month after month. Before considering it, look at what you can change inside the business, and read when borrowing is not the answer. If you do apply, a forecast helps you show when and how any repayment would be met.

Important things to know

• A forecast is only an estimate. Base it on when customers actually pay, and update it as things change.
• Plan for tax and super. business.gov.au suggests setting money aside regularly so it is ready when tax payments are due.
• Watch the lowest point, not the average. A good quarter can still contain one very tight week.
• Seasonal businesses need a buffer. business.gov.au’s guidance on improving cash flow suggests planning ahead for known quiet periods.
• Working capital and cash flow go together. For the snapshot view of your short-term assets and bills, see what is working capital? Terms are explained in the glossary.