A business can be profitable in every month of its first year and still run out of money. That is not a paradox, and it is not a warning about sloppy bookkeeping. It is ordinary arithmetic, and it is the reason a cashflow forecast is a different document from a profit forecast.
Your profit statement answers one question: am I making money? Your cashflow forecast answers a different one: can I pay for things this month? Most business plans contain the first and skip the second, which is the wrong way round. No business has ever been shut down for being unprofitable. They close when the account is empty.
A profit forecast records a sale in the month you make it. A cashflow forecast records it in the month the money lands in your account. Everything that makes the two documents differ is a gap between those two moments.
There are three of them, and they are worth knowing by name:
The first two are arithmetic, and a forecast can do them for you. The third is a judgement about your own customers, and no forecast can know it in advance.
It is worth being plain about what that means here. B-PlanDIY assumes the money from a sale reaches your bank in the month you make it. For a cafe, a cart, a shop or anyone paid at the point of sale, that is simply true. If you invoice on the 20th of the month following, it is not, and the lag is yours to allow for — either by entering it under Other transactions in Step 5, or by carrying a bigger buffer than the forecast says you need. The same goes for stock you pay for well before you sell it.
GST is 15%, and you must register once your turnover passes $60,000 in any rolling twelve months — either because it already has, or because you reasonably expect it to.
Once registered, how often you file depends on size. Under $500,000 of sales you can file six-monthly. Under $24 million, two-monthly. Above that, monthly.
Six-monthly filing sounds like less paperwork, and it is. It also means that twice a year a single large bill lands in a month that otherwise looks ordinary. If your forecast spreads GST evenly, or leaves it out because “it washes through”, your forecast will be wrong in exactly the two months it matters most. It is why Step 5 asks which months you pay your GST rather than assuming an answer — the bill has to land where it really lands.
The GST in your account is not revenue. You are holding it for Inland Revenue.
Our sample plan is Rolling Beans, a coffee cart in Whangārei. It is a deliberately easy case: a 75% gross margin, $601 a month of fixed costs, no rent, no debt, and customers who pay at the cart, so there are no debtors at all. It is profitable from its first month and every month after.
Here is the first year. Opening bank balance $5,000.
| Month | Net profit | GST paid to IRD | Cash movement | Closing balance |
|---|---|---|---|---|
| Aug 26 | $1,142 | – | $3,314 | $8,314 |
| Sep 26 | $1,251 | – | $1,439 | $9,753 |
| Oct 26 | $1,372 | −$360 | $1,218 | $10,971 |
| Nov 26 | $1,505 | – | $1,731 | $12,702 |
| Dec 26 | $1,649 | – | $1,896 | $14,598 |
| Jan 27 | $1,810 | – | $2,081 | $16,679 |
| Feb 27 | $1,985 | – | $2,283 | $18,962 |
| Mar 27 | $2,180 | – | $2,507 | $21,469 |
| Apr 27 | $2,390 | −$1,575 | $1,173 | $22,642 |
| May 27 | $2,624 | – | $3,018 | $25,660 |
| Jun 27 | $2,882 | – | $3,315 | $28,975 |
| Jul 27 | $3,214 | – | $3,696 | $32,671 |
| Year | $24,004 | −$1,935 | $27,671 | $32,671 |
Figures from the B-PlanDIY sample plan. August includes $2,000 of capital introduced, which is why the first month’s cash movement is larger than its profit.
Look at April. The business earned $2,390 that month — its second-best month so far — and the bank account grew by $1,173. Less than half. Nothing went wrong, no customer failed to pay, no cost blew out. The six-monthly GST bill of $1,575 simply fell due. The dent is not quite the full $1,575, because April’s own sales put $358 of GST back into the account on its way to the next bill — which is the whole problem in one line. Money arrives, money leaves, and neither movement is the month’s profit.
Now look at the year as a whole. Profit was $24,004. The bank balance grew by $27,671. The business generated $3,667 more cash than it made in profit, which sounds like good news and is not. The difference is exactly this:
$24,004 profit + $2,000 capital introduced + $1,667 of GST collected and not yet paid = $27,671
That last figure is the one to sit with. Of the $32,671 showing in the account on 31 July, $1,667 belongs to Inland Revenue. It will leave. The forecast is not wrong — it is telling the truth about a bank balance — but the bank balance is not a measure of what you can spend.
And remember Rolling Beans is the easy case. It has no debtors, no stock to speak of, no loan principal, and the owner has taken nothing out of the business all year. A business that invoices on the 20th of the month following, carries stock, repays a loan and pays its owner has every one of them working at once.
The figure everyone looks at is the closing balance at month twelve. It is the least useful number in the forecast.
The number that decides whether you survive is the lowest point the balance reaches at any time during the year. Rolling Beans never dips — the balance rises every month. Most businesses are not like that. Seasonal trade, a quiet winter, a large stock purchase, a GST month and a slow payer landing together: the low point is usually somewhere in months three to seven, and it is usually a long way below where the year ends.
If that low point is below zero, you have your answer before you have spent anything. You need that much more funding than you thought, and you need it before you open, not when you notice. We covered how to size that figure in how much money do I need to start a business in New Zealand.
If it is above zero but close to it, add a buffer. The low point assumes every figure in the forecast is right, and no forecast is.
None of this is difficult arithmetic, and that is worth saying plainly. The reason most small businesses have no cashflow forecast is not that the maths defeated them. It is that profit feels like the real number and cash feels like an administrative detail — right up to the week it is the only number that matters.
A profit forecast tells you whether the business is worth running. A cashflow forecast tells you whether you will still be running it when the GST bill, the quiet month and the slow payer all arrive in the same four weeks. You need both. Only one of them is usually in the plan.
Build yours in under an hour. B-PlanDIY walks you through five steps to a business plan and a 12-month cashflow forecast, and shows you the lowest point your bank balance reaches. The plan and the forecast are free.
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