Editorial content prepared for José’s review. General management information; not accounting, tax, investment or financial-product advice.
Profit and cash answer different questions. Profit describes income and expenses recognised for a reporting period under the accounting approach being used. Cash flow describes money received and paid. The difference matters when an owner is deciding whether the business can meet an upcoming payment, even when a report shows profitable trading.
Your accountant or bookkeeper should confirm how your records are prepared. A management cash forecast does not replace reliable accounting records; it adds a view of payment timing to support operating decisions.
A timing example
Illustrative example — not a client result: a hypothetical business invoices a customer for A$10,000 and records A$7,000 of related costs. Assume those amounts belong to the same reporting period, exclude GST and ignore other items for simplicity. The simplified margin is A$3,000. If the customer pays later but the A$7,000 is due now, that margin does not provide the cash required today.
The example is deliberately narrow. Actual profit depends on all applicable expenses and the treatment of the transactions. Its purpose is to show why the receipt date matters, not to provide an accounting entry or tax calculation.
Why the bank balance is not the whole picture
The bank balance tells you what is available at a moment in time. It does not show every commitment that is approaching or explain how much of the balance may be needed for existing obligations. A large receipt can coincide with supplier bills, payroll or planned expenditure. An owner who sees only the balance may overlook that timing.
Conversely, a low balance may reflect a temporary timing gap rather than an unprofitable operating model. That distinction still needs investigation. Cash pressure should not be dismissed simply because it appears temporary.
Build a forecast around actual dates
Start with the available opening cash. List expected receipts when they are reasonably expected to arrive, rather than copying the invoice date. Then list payments by expected payment date. Include regular operating costs and known one-off commitments. Keep assumptions separate from confirmed information.
The business.gov.au cash flow resource provides a statement template and explains the relationship between opening cash, incoming cash, outgoing cash and closing cash. It also highlights the need to label estimates and state GST treatment. Confirm the appropriate treatment with your accounting adviser.
Review the assumptions that move cash
Ask which receipts are confirmed, which depend on new work and which may be delayed. Check supplier terms rather than assuming that every cost is paid immediately. Inventory purchases, customer deposits and repayment schedules can create timing differences that a simple sales-and-cost summary misses.
Run a cautious scenario. Move a significant receipt later or revise a cost assumption using an evidence-based reason. Note the earliest point at which available cash becomes a concern and the decisions that would need attention. Do not assume a new loan or additional owner contribution unless it is explicitly part of an agreed scenario.
Compare the forecast with what happened
At the agreed review point, compare expected receipts and payments with actual movements. Separate timing differences from lasting changes. A customer paying later than planned may change the next period; lost work may change the whole outlook. Record the explanation and revise future assumptions.
Choose a review frequency suited to the business and its uncertainty. The owner should know who maintains the forecast, who confirms accounting inputs and what issue should trigger a discussion before the next scheduled review.
Use both views together
Profitability and liquidity should inform each other. A business cannot infer sustainable profitability from a positive bank balance, and cannot infer adequate cash from a profit figure. A clear forecast and reliable reports make the questions easier to separate.
For operating budgets and cash scenarios, see Business Financial Planning. The proposed service excludes personal financial, investment, superannuation, insurance and financial-product advice. Enquire About This Service using a brief description rather than sensitive financial documents.