Cash is King

|by Shaun Ralph|Taxation and Compliance

If a business runs out of cash and cannot pay its debts when they fall due, the business is considered to be insolvent and may have to shut down business operations as a result. There serious ramifications to business owners who trade whilst insolvent and unfortunately “Management didn’t see a cash flow crisis coming” is not a valid excuse.

What is a cash flow forecast?

A cash flow forecast predicts the cash inflows and cash outflows of the period (weekly, monthly or quarterly) and what the resultant bank balance will be at the end of this period, considering timing of such payments as GST, PAYG, and Superannuation which commonly do not occur every month. An example is below.


Here are the key reasons why a cash flow forecast is so important:

Identifies potential shortfalls in cash balances in advance – think of the cash flow forecast as an "early warning system". This is the most important reason for a cash flow forecast: for example, if the forecast shows a negative cash balance then the business needs to analyse ways to bring it back into positive, such as tighter debt collection policies or ensure it has a bank overdraft facility to cover the shortfall

Makes sure that the business can afford to pay suppliers and employees. Suppliers who don't get paid will soon stop supplying the business; the impact is even greater if employees are not paid on time, the forecast will assist with trying to prevent this occurring

Make sure you stay up to date with obligations – Timing in your cashflow forecast is important, knowing when ATO and other compliance related costs are due will help remove any unpleasant surprises.

External stakeholders may require a cashflow forecast – Banks are asking for cashflow forecasts more often these days to make sure all bank loans are serviceable.

Possible investors – To ensure a business is investor ready, it is good practice to have a robust cashflow forecast, as Investors are likely to what to know how their investment will be spent and when they can expect a possible return.

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