Cash flow forecasting for NZ small businesses: how to know when cash could get tight

Cash flow is one of the biggest challenges facing small and medium-sized businesses in New Zealand. A business can be profitable on paper and still struggle to pay suppliers, wages, tax or other bills when cash coming in does not arrive at the right time.

This is why cash flow forecasting is such an important financial management tool.

Rather than waiting until the bank balance starts looking uncomfortable, a cash flow forecast allows business owners to look ahead, identify potential shortfalls and make better decisions before problems arise.

What is cash flow forecasting?

A cash flow forecast is an estimate of the money expected to come into and go out of your business over a future period.

Unlike a profit and loss statement, which measures revenue and expenses, a cash flow forecast focuses on when money actually enters and leaves the business.

For example, a business might invoice a customer $30,000 in August, but if that customer does not pay until October, the business cannot use that $30,000 to pay August expenses.

This timing difference can create significant pressure.

A cash flow forecast helps you see these gaps before they become a problem.

Why profitable businesses can still run out of cash

One of the most important things for business owners to understand is that profit does not equal cash.

You may have:

• Strong sales but slow-paying customers

• Large amounts of money tied up in stock

• Significant equipment purchases

• Loan repayments

• GST and tax obligations

• Seasonal fluctuations

• Increasing wages and operating costs

All of these can affect your available cash.

For example, a business may report a healthy profit but have several large invoices outstanding. At the same time, wages, rent and supplier bills still need to be paid.

Without adequate cash reserves or planning, the business can find itself under pressure despite appearing profitable.

Start with your expected income

The first step in creating a cash flow forecast is identifying when money is expected to come into the business.

Consider:

• Customer invoices already issued

• Expected customer payments

• Regular recurring revenue

• New sales you reasonably expect to close

• Other income

• Loans or funding

• Asset sales

Be realistic.

A forecast should not be based on your best-case scenario. It should reflect what you reasonably expect to happen.

If customers normally take 30 days to pay, don't assume every invoice will be paid immediately.

Then identify your outgoing payments

Next, list the payments your business expects to make.

These could include:

• Wages and salaries

• Rent

• Supplier payments

• Software subscriptions

• Insurance

• Loan repayments

• Marketing

• Vehicle costs

• Equipment purchases

• Professional fees

• GST and tax obligations

Some expenses will be predictable, while others may be irregular.

Including both is important because unexpected large payments can have a significant impact on cash flow.

Look beyond the next month

A common mistake is only looking at the current bank balance.

Instead, consider forecasting cash flow several months ahead.

This can help you identify periods where:

• Tax payments are due

• Major customers typically pay late

• Seasonal sales decline

• Large annual expenses occur

• You plan to hire employees

• Equipment purchases are required

• Loan repayments increase

The further you look ahead, the more time you have to respond.

What should you do if a cash shortfall is forecast?

Identifying a future cash shortfall does not necessarily mean your business is in trouble.

It gives you an opportunity to act.

Depending on the circumstances, you may be able to:

• Follow up overdue invoices

• Improve payment terms

• Review unnecessary expenses

• Delay non-essential purchases

• Negotiate supplier payment arrangements

• Build a cash reserve

• Adjust inventory purchasing

• Review pricing

• Arrange appropriate funding

The key is to make these decisions before the cash shortage occurs.

Cash flow forecasting should become a regular habit

A cash flow forecast is not something that should only be created when the business is experiencing financial difficulty.

Reviewing your forecast regularly gives you a much clearer picture of your financial position.

It can also help you answer important questions:

Can we afford to hire another employee?

Can we purchase new equipment?

Can we take on another project?

Can we afford to increase drawings?

How much cash should we retain in the business?

These are business decisions, but they are also financial decisions.

Get more from your business numbers

Your accounting information should do more than tell you what happened last month.

The right financial information can help you understand what is likely to happen next.

At Affinity Accounting & Advisory Limited, we help New Zealand business owners understand their numbers and use financial information to make more informed decisions.

If you're unsure about your future cash position, a cash flow forecast could be a valuable place to start.

Talk to Affinity Accounting & Advisory Limited about developing a clearer picture of your business's future cash flow.

What our clients say

“Dylan is one of the best accountants I've worked with. He makes a point of explaining things as plainly as possible to those of us who don't understand accounting speak. He has a solid knowledge of best practices in the industry, but most importantly he will always recommend what is most suitable for your specific business. I will continue to recommend Dylan and Affinity Accounting to my clients when they are looking for an accountant.”

-Jay Brooker