If you’re having trouble paying your ATO debts when they fall due, struggling to pay your employee compulsory superannuation contributions or maybe there is just never enough cashflow in the bank for everyday expenses, then you need a cashflow forecast. This is one of the top challenges of any business so you are not alone if you are facing these or similar cashflow issues.

So, what is a cashflow forecast?

This is a common question. A cashflow forecast basically looks into the future at the expected inflows and outflows of cash from your business. It factors in on average how quickly your customer invoices get paid (e.g. 14 days) and also how quickly you pay your supplier invoices (e.g. 30 days). Just because you have issued an invoice and made a sale doesn’t mean you have the cash in the bank.

More importantly, a cashflow forecast will show your ATO and employee obligations, which are usually due 28 days after the end of the month or quarter, and how this will affect your cashflow. When businesses simply rely on their bank balance to determine the performance of their business, they readily come undone when at the end of the quarter they are required to pay employee superannuation plus the GST & PAYG on their activity statement, which can be a substantial hit to cashflow.

In many cases, businesses aren’t in a position to now pay their ATO debt because they haven’t forecasted and planned for this payment and so they start falling behind. Once this happens a couple of times, which from experience I can tell you it does, they are now left with quite a large debt owing to the ATO.

Let’s take Christmas time for example. If you own a law firm, you’ll probably close down for a few weeks, which means having to continue paying occupancy expenses, employee annual leave and cyclically things will be quiet in December and January each year. A bit of planning around cashflow would be a wise move, especially seeing as you have the December BAS due in Februrary when you are just back on the tools. Maybe those clients you have just billed have 30 days to pay and you now need to fork out for your ATO obligations. I see this ALL THE TIME!

But what about an industry like retail at Christmas time. You are opening the shop longer hours, meaning an increase in expenses, especially employee wages and you also have a spike in revenue from all those hungry christmas shoppers. Again this will settle come mid-January and once February hits you again need to pay your BAS which will include all that extra revenue and employee PAYG from the October to December period. If you haven’t forecasted for that one it is going to hurt BIG TIME!

cashflow forecast charts gallery example

The above image is an example from our CFO Cashflow Forecasts Report and what is showing in these nice colourful graphs is that JUL i.e. meaning July, is the current month (which is greyed out with a vertical grey bar) and anything before that, so to the left are actual numbers and anything to the right of that grey bar are forecasted numbers. The top left graph titled “Cash On Hand Forecasts” shows about a -$17,000 cash position in July however from there it trends quite aggressively upwards before plateauing and dropping off in December ever so slightly. This looks good.

The bottom left graph supports its brother above with the blue line representing Cash In and you can see it peaking, then in late December through to March the red Cash Out line is above the blue line, hence the plateau and dip in cashflow in those months.

The bottom right graph again shows the relative cash position of each month interrupted in a different way and the top right graph shows where the cash is coming from or going to.

Let’s now compare this sort of level of reporting and detail to how the majority of business owners monitor their cash position and that would be via their bank balance.

  • If there’s money in the bank = good
  • If there’s not much money in the bank = bad

The problem with relying solely on your bank balance is that it is a static number meaning it is only ever showing a real time number as at today. Nothing in the future. I can tell you one thing the bank balance is good for, and that’s telling you how much is in the bank but that’s about it.

Now if you’ve read our previous blog you’ll know that the new Xero Business Performance Dashboard is going to give you an amazing insight into your business but it will only be real-time and historical numbers, no forecasting. Don’t get me wrong, this is going to be awesome so be excited but you can’t click one button for a cashflow forecast.

Remember that a live budget and a cashflow forecast go hand-in-hand. The budget is your projected income and expenses for a future period which, depending on your industry and business model, may be quite flat and uniform over 12 months or may be up and down and all over the shop. The cashflow forecast is specifically about the cash moving in and out of the business and is made even more powerful by forecasting the payment of ATO activity statements and income tax which is not apart of your budget.

If you’d like to know more, we’d like to help, so please comment below or don’t hesitate to contact us.