Cash Flow Vs Profit

A Cash Flow Forecast is the best way for a business owner to ensure they have the funds available to pay for running costs and taxes.  

Consider this scenario: there’s no cash in your account to pay your upcoming bills and yet your business is showing a profit. If that’s ever happened to you, you’d be forgiven for wondering what was going on! And that’s where a Cash Flow Forecast – not to be confused with a Profit & Loss Statement (P&L) – comes into its own.  

A P&L has its place among the analytical tools that help keep your business on track. It records income from your customers, as well as all your expenses, such as wages, superannuation and other operating costs, and by balancing the outgoing against the incoming, gives you your net figure, your profit or loss.  

But it does not factor in when a bill is due to be paid, nor does it include items from your Balance Sheet that are likely to affect cash flow, such as loan repayments and BAS payments.  

A Cash Flow Forecast goes one better – it combines elements from the P&L with items from your Balance Sheet. So, while your P&L is broad brushstroke, the Cash Flow Forecast gives you the fine detail of a much bigger picture. For example, you’re due to pay your staff wages on 1 August, at which point your P&L will look like this: 

1 August 

Wages $10,000  

Superannuation $1,150  

Total $11,100  

But this does not indicate when and how much cash will actually be coming out of your bank account. By contrast, a cash flow projection for this transaction would look more like this: 

1 August 

Net wages paid from bank $7,000  

25 September  

IAS lodgement (employee tax withheld paid to ATO) $3,000  

10 October

Pay employee superannuation $1,150  

Total $11,150  

By alerting you that $3,000 will be needed in September and a further $1,150 in October, a Cash Flow Forecast minimises painful payment surprises and puts you in the driver’s seat, able to confidently make business decisions such as allocating funds for upcoming payments, knowing when you can safely invest surplus cash, and when the time is right to expand your business.