THE NATIONAL BANK OF NEW ZEALAND
Solution Guide
The benefits of cashflow forecasting
Managing your cashflow efficiently is a key business skill. This guide explains the principles of
cashflow management and shows how businesses that neglect this task can get into difficulties.
This guide is designed to be read in
conjunction with the Solution Guides ‘The
benefits of a profit forecast’ and
‘Understanding working capital.’
What is cashflow?
Cashflow is the lifeblood of any business,
and the aim of all business people is to
increase positive cashflow (more money
coming in than has to go out). Cashflow
refers to the daily ebb and flow of money in
and out of your business. Money comes in
from sales, and money is paid out to meet
bills and commitments. The difference
between what you get in and what you pay
out is the cash surplus (or shortfall) you
have (or will need to find) to keep your
business afloat: to pay rent, wages, replenish
stock, etc.
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FROM NATIONAL BANK BUSINESS BANKING
June 2004
Purpose of the cashflow
forecast
Cashflow management is all about time:
the timing of money coming in and money
going out.
Do you have cashflow problems?
Test yourself
• Do you ever fall into overdraft by
mistake and have to arrange a quick
meeting with your Business Banking
Manager?
• Have you struggled to meet business
overheads and wages during seasonal
downturns?
• Have you traded too strongly and had to
ask for special funding arrangements to
meet your commitments?
• Have you ever had to ask for an
overdraft to pay an ‘unexpected’ tax bill?
These challenges all signal the need for
good cashflow management skills.
The purpose of cashflow forecasting is to
manage the gap between when the money
comes in (if you have credit sales this could
be one to two months - or even longer -
after you’ve done the work) and when your
bills are due. This is where the skill comes
in. Your objective is to practise proactive
rather than reactive management, in other
words to anticipate cashflow challenges well
in advance so that you can take timely steps
to manage the situation.
Elements of the cashflow
forecast
The cashflow forecast is essentially a table
or spreadsheet that allows you to project
ahead the cash receipts into your business
and the cash payments out of your business.
Your Business Plus or Focus CD-ROM
provides a cashflow forecast that provides
automatically calculated totals. You’ll see the
cashflow forecast runs over 12 months and
has three parts:
1. Cashflow in. This includes all the cash
you think you’ll get in any particular
month. In addition to forecasting actual
cash sales, you also have to take into
account credit sales and estimate in
which month you’ll actually receive this.
Remember, the cashflow forecast deals
only with the cash you’ll actually
receive during each month. You’re
essentially trying to predict what your
THE NATIONAL BANK OF NEW ZEALAND, PART OF ANZ NATIONAL BANK LIMITED
bank statement will look like each
month. Note that under incoming cash
you should also record loans received,
funds introduced into the business by
the owner or shareholders, and any
wage subsidies received from Work and
Income.
2. Cashflow out. This includes all the
monthly expenses that drain actual cash
out during that month. Again you’re
trying to get as close as possible to what
the bank statement will look like. You
should include drawings, GST and tax
payments, any purchases of fixed assets,
etc.
3. Calculating net cashflow. In the final
short section the spreadsheet will
automatically subtract cash in from cash
out to give you your net cash flow.
Once you enter your Opening bank
balance for the first month (the balance
at the start of that month) it will then
show you what your Closing bank
balance will be.
So where do you get the figures from?
• If you have an established business
then you can use last year’s figures as a
basis for this year’s estimates (with any
necessary adjustments for
inflation/deflation or sales growth).
• If you don’t have at least 12 months
trading behind you, then you’ll need to
estimate some of the figures. Ask your
 accountant for advice here. For
example, most accountants will be able
to help you estimate business overheads
based on their experience with many
other businesses.
Forecasting tips
• You’re defeating the purpose of a
cashflow forecast if your figures are
optimistic. It is better to be realistic and
conservative, especially in your estimates
of sales revenue.
• Your accountant will often be able to
spot items that you may have missed.
For example, don’t forget to include
provisional tax and other tax payments.
In a well managed business there should
be no such thing as a ‘tax shock’.
• Use GST inclusive figures in your
Cashflow Forecast, and include GST
payments in your Expenses (cash
payments) section.
• If seasonality is an issue for your
business then the cashflow forecast
should also prompt and encourage you
to put aside reserves to pay for wages,
office overheads and other running
expenses during the lean months.
What are the benefits?
Benefits of cashflow forecasting include:
• A reduction in stress and pressure. The
ability to spot trends and anticipate a
THE NATIONAL BANK OF NEW ZEALAND, PART OF ANZ NATIONAL BANK LIMITED
cashflow crunch. The sooner you can
anticipate a tight cashflow period the
more time you have available to take
contingency action. For example:
o Asking for an extended overdraft
over the tight period.
o Speaking to suppliers about
extended lines of credit.
o Having a sale to raise cash from
slow moving stock.
The main cashflow pitfalls
Poor management of the ‘Big Three’
The Big Three in cashflow management are
your creditors (people you owe money to),
your debtors (people who owe you money)
and stock (which is often defined as ‘money
in chains’). Effectively managing these three
will significantly improve your cashflow.
The Solution Guides listed at the end in
Resources will help you achieve this.
Forgetting about taxes
It’s easy to forget about your taxes. Speak to
your accountant about your forthcoming tax
liabilities and factor these into your
forecasts.
Drawing too much out of the business
Be careful of draining too much money out
of your business in the form of personal
drawings, particularly during the leaner
cashflow months.
Committing to purchases at inappropriate
times
It’s easy to place unnecessary stress on your
cashflow by purchasing items at the wrong
time in your cashflow cycle. For example,
committing to capital item purchases during
lean cashflow months. In some cases, the
business might be better off leasing rather
than purchasing outright. (see Resources
for a helpful Solution Guide).
Under-trading and over-trading
Under-trading is relatively easy to
understand: it means not doing enough
business to cover your costs and make a
profit. But a number of business people
aren’t aware that over-trading can also lead
to a business collapse. “You mean I could
go under from doing too much business?”
people ask. Yes, it happens quite frequently,
because the business becomes overstretched
and simply does not have the resources to
fund the increased sales. For example,
suppose you sell $20,000 worth of stock for
$40,000 - but don’t get paid for 60 days.
You have to re-order the $20,000 stock to
keep in business. Not having this money
available is in itself an indication of poor
cashflow management because you still have
to pay rent, wages, etc., during the waiting
period. If you can’t meet your obligations,
then someone you owe money to could
force you into receivership - even though
you’ve just had sales of $40,000! So it’s
THE NATIONAL BANK OF NEW ZEALAND, PART OF ANZ NATIONAL BANK LIMITED
perfectly possible for a profitable
business to fail if it grows faster than its
capacity to generate cash.
Managing your cash
The essence of cash management in a
growing business is to understand your cash
cycle. This differs from business to
business. For example, if you operate a retail
cash-only business (such as a hairdressing
salon) then your cash cycle is basically one
day. However, if you are a builder or a
quantity surveyor, your cash cycle likely to
be much longer – it may take months for
you to get paid for the work you do. If
through your cashflow forecasting you can
see that there are going to be obvious gaps
then there are three possible actions you can
take:
• Try to change (shorten) your cash cycle
by getting money in sooner.
• Speak to your Business Banking
Manager about possible bridging
finance.
Your strategy might include all three tactics.
Remember that in a growing business it’s
your responsibility to keep on top of the
figures until you’ve reached the stage where
you can employ an accountant or financial
officer to monitor the cash cycle.
 Conclusion Resources

Negotiate from strength Other relevant Solution Guides include:

In spite of your best efforts to plan your ‘The benefits of a profit forecast’
cashflow rhythms efficiently, you’d be very ‘Understanding working capital.’
lucky not to experience a cashflow crisis at ‘Tax made simple’
some stage or other. Most growing ‘Five steps to make sure you get paid’
businesses experience some degree of ‘How to collect debts’
cashflow difficulties as part of their growth - ‘Tips to improve your cashflow’
in fact it’s almost part of growing up as a ‘Should I own or lease?
business. What distinguishes competent ‘Pricing strategy made easy’
business people is their ability to predict ‘GST made simple’
such events because their fingers are firmly ‘Understanding your profit & loss
on the pulse of their businesses. If you statement’
manage your cashflow well there may be ‘Understanding your balance sheet’
times when surplus cash can be placed into
interest earning deposit accounts - talk to
your Business Banking Manager about the
options available.

Further information:

To talk to someone about your business banking needs call 0800 16 88 88 and we will put you in
touch with the Business Banking Manager nearest you or visit www.nationalbank.co.nz/business

DISCLAIMER: THIS MATERIAL IS PROVIDED AS A COMPLIMENTARY SERVICE OF THE NATIONAL BANK OF NEW ZEALAND, PART OF ANZ
NATIONAL BANK LIMITED ("BANK"). IT IS PREPARED BASED ON INFORMATION AND SOURCES THE BANK BELIEVES TO BE RELIABLE. ITS
CONTENT IS FOR INFORMATION ONLY, IS SUBJECT TO CHANGE AND IS NOT A SUBSTITUTE FOR COMMERCIAL JUDGEMENT OR
PROFESSIONAL ADVICE, WHICH SHOULD BE SOUGHT PRIOR TO ACTING IN RELIANCE ON IT. TO THE EXTENT PERMITTED BY LAW THE
BANK DISCLAIMS LIABILITY OR RESPONSIBILITY TO ANY PERSON FOR ANY DIRECT OR INDIRECT LOSS OR DAMAGE THAT MAY RESULT
FROM ANY ACT OR OMISSION BY ANY PERSON IN RELATION TO THE MATERIAL.
 2004 THE NATIONAL
T H E N A T I OBANK OF
NAL B A NNEW
K O FZEALAND,
N E W Z E APART
L A N DOF
, PANZ
A R TNATIONAL
O F A N Z NBANK
A T I O NLIMITED.
A L B A N KALL
L I MRIGHTS
I T E D RESERVED.