Cash Flow Forecasting: Why Your Profitable Business
Might Still Run Out of Money

One of the most dangerous misconceptions in small business is the belief that if your business is profitable, it must also have cash. The reality is very different — and many profitable businesses have failed because they ran out of money.

Profit vs. Cash Flow: What's the Difference?

Profit is an accounting concept. It's the difference between your revenue and your costs over a period of time, calculated on an accrual basis — meaning it includes income you've invoiced but haven't yet received, and costs you've incurred but haven't yet paid.

Cash flow, on the other hand, is about the actual movement of money in and out of your bank account. You can be highly profitable on paper but completely illiquid if your customers pay slowly, you hold significant inventory, or you've just made a large capital investment.

Common Causes of Cash Flow Problems

• Slow-paying customers — You've invoiced for the work, but the money hasn't arrived yet.
• Rapid growth — Growing fast often requires spending before you receive payment.
• Seasonal revenue — Income bunches in certain months, but costs continue year-round.
• Large capital purchases — Buying equipment or vehicles drains cash, even if the asset will generate income long-term.
• GST obligations — GST collected from customers must eventually be paid to IRD — it's not your money.

How to Build a Simple Cash Flow Forecast

A cash flow forecast doesn't need to be complicated. Start with a simple spreadsheet covering the next 3–6 months:

1. Opening balance — Your bank balance at the start of each month
2. Cash in — Expected receipts from customers, based on when you expect to be paid (not when you invoice)
3. Cash out — All expected payments: wages, rent, suppliers, loan repayments, GST, tax, etc.
4. Closing balance — Opening balance + cash in – cash out

Update your forecast monthly against actual results. The gap between forecast and actual tells you a lot about your business and helps you plan more accurately over time.

What to Do When You Spot a Gap

The great advantage of a forecast is that it gives you time to act. If you can see a cash shortfall coming three months ahead, you have options: accelerate collections, delay non-essential spending, arrange a temporary overdraft, or explore invoice finance. With one week's notice, your options are much more limited.