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Technical guide

Cashflow forecasting: Your secret weapon in tough economic times

Reduced consumer spending. Finding talent. Rising interest rates. Inflation. Supply chain challenges. Exponentially increasing petrol prices. Escalating conflict in Europe. To say doing business is difficult in New Zealand (or anywhere) right now is an understatement.

It all paints a bleak economic outlook. These ever increasing head winds means it’s important you understand your businesses’ pressure points now more than ever; if cash is going to be tight, what you can do about it?

Strong cashflow management can mean the difference between survival and failure.

Cashflow is key – but don’t confuse it with profit.

Cashflow shouldn’t be confused with profit. Profit is the difference between income and expenses. This can include non-cash items such as depreciation, foreign exchange gains or losses, and amortisation of goodwill. Profit is frequently used as a measure of growth and performance in a business, but it won’t provide a clear picture of your company’s liquidity.

Cashflow, on the other hand, is the level of funds available to pay wages and bills – the lifeblood of the business. It comprehensively measures not only net cash received from business activities, it also includes debt repayments, asset sales and purchases, GST payments, and capital introduced from owners.

Forecasting your cashflow is crucial.

The timing of cash receipts and cash payments is vital. While a monthly forecast provides an overall estimate of the company’s cash requirements, it doesn’t take into account inter-month fluctuations which can be material, leaving you in the dark about if and when key commitments (such as wages) can be met in advance.

Preparing a detailed granular cashflow forecast is the best way to monitor these requirements and prepare for any unexpected financial issues on the horizon. It gives you the ability to assess your upcoming cashflows to survive periods when there may be a cash shortfall, and the business can’t pay its debts as they fall due.

A range of possible outcomes can be built into your forecast to cover all areas of uncertainty that may impact your business. These potential outcomes will help you identify the need for any additional finance requirements to cover a predicted shortfall and/or necessary changes in repayment obligations to try and negate deficits.

But wait there’s more…

  • Cashflow forecasting also gives you the ability to assess your current practices by highlighting some ways to improve cashflow, including:
  • Invoicing regularly and consistently
  • Adding late payment charges, fees or interest for late payments
  • Allowing instalment payments on larger debtors
  • Consolidating loans to simplify repayment obligations
  • Paying bills on their due date unless there are discounts offered for early payment
  • Reviewing purchasing systems to reduce stock on hand
  • Reviewing supplier terms and payment timeframes
  • Holding a sale to move old stock
  • Avoiding overestimating provisional taxes
  • Reassessing sales prices and passing on any recent cost increases to the purchaser
  • Avoiding big ticket purchases in the short term and leasing instead
  • Expanding your customer base and increasing sales

A tool to help you get started

There will always be big economic factors beyond your control. The Resilience Wheel helps you manage five areas within your control: Contingency planning, people, stakeholder management, setting up a crisis management team, and of course, cash management.


Also contact:

Russell Moore

National Managing Partner
M: +64 21 618 435

Stephen Keen

Senior Manager, Financial Advisory Services
M: +64 27 203 2374