Concepts
Cash flow
Cash flow is the movement of money into and out of your business over time, and it determines whether you can pay bills, wages, GST and tax when they fall due.
Cash flow describes the actual movement of money in and out of a business. Cash comes in from customers, loans and owner contributions, and goes out to suppliers, employees, landlords, lenders, the ATO and the owner. Positive cash flow means more is coming in than going out over a period. Negative cash flow means the reverse, and if it continues, the business may be unable to meet its obligations even if it is profitable on paper.
Cash flow is not the same as profit. Profit is calculated on the basis of income earned and expenses incurred. Cash flow follows the bank balance. A large sale on credit boosts profit immediately but does not bring in cash until the customer pays. Buying stock or equipment reduces cash right away but may only reduce profit gradually. This timing gap is why many profitable small businesses still struggle with cash.
GST has a direct effect on cash flow. If you account for GST on an accruals basis, you may need to pay GST to the ATO on a sale before your customer has paid you. On the other hand, GST credits on large purchases can produce a refund. If you use cash accounting for GST, you report GST when money moves, which can ease the timing problem. Either way, treat the GST you collect as money held for the ATO, not as spendable revenue.
Tax payments also need planning. BAS amounts for GST and PAYG withholding, PAYG instalments, super contributions for employees and income tax at year end can add up to large payments on specific dates. A simple cash flow forecast that lists expected receipts and payments by week or month, including those dates, helps avoid shortfalls. Keeping a separate savings account for GST and tax is a practical habit many small businesses use.
There are practical ways to improve cash flow. Invoice promptly, set clear payment terms, follow up overdue accounts, negotiate supplier terms, hold only the stock you need, and review pricing. If you do fall behind on a tax debt, contacting the ATO early to arrange a payment plan is generally better than ignoring it, as the general interest charge can apply to unpaid amounts.
A common misunderstanding is assuming a profitable business must have healthy cash. Another is forgetting that owner drawings, loan principal and capital purchases are cash outflows that do not appear in profit in the same way. Regular reconciliation of your bank accounts and a rolling forecast keep you ahead of problems. This is general information only, so confirm how tax obligations affect your situation with the ATO or a registered tax professional.
Worked example
A contractor invoices $22,000 including $2,000 GST in June. She reports GST on an accruals basis, so the $2,000 is due in her June quarter BAS, payable the following month. Her customer pays in August. If she also owes $3,000 in other BAS amounts, she needs $5,000 available in July even though no cash has arrived, so she plans a forecast and a buffer account.
Practical tips
- Prepare a simple cash flow forecast that includes BAS, super and tax dates.
- Keep the GST you collect in a separate account so it is there when the BAS is due.
- If you cannot pay an ATO debt on time, contact the ATO early about a payment plan.