An illustrative composite client situation
This is an illustrative composite client situation, not one identifiable client or a Pillar result. It combines cash timing questions that owner-managed New Zealand businesses raise when sales increase faster than the bank balance.
An Auckland business was heading into a busy trading period. Its management profit and loss statement showed a profit and sales were growing. The owner could see something else in online banking: less cash was available than a few months earlier. New orders would require more stock and staff time before customers paid.
The first question was: “If the business is profitable, why are we short of cash, and can we afford to keep growing?”
The P&L cannot answer that question alone. The accountant would need to check whether the accounts are complete, then trace customer receipts, stock and work in progress, supplier timing, tax, equipment spending, finance and owner distributions. A forecast can show where pressure may arise, but it is only as reliable as those records and assumptions.
Profit and cash record different events
Business.govt.nz explains that a P&L measures financial performance over a period. Revenue includes cash sales and credit sales. A customer invoice can therefore contribute to revenue and profit before the customer has paid it. The unpaid amount sits in accounts receivable on the balance sheet.
A cash flow statement follows money moving into and out of the business. It adjusts for accounts receivable, accounts payable and inventory. It also separates operating cash from investing and financing movements, including long-term asset purchases, borrowing, dividends and debt repayment.
This does not mean reported profit is wrong. It means the P&L and bank balance answer different questions. Before analysing the gap, the accountant should also confirm that bank reconciliations, customer invoices, supplier bills, payroll, inventory movements and month-end entries are complete for the same cut-off date.
Find where the timing changed
In the composite situation, growing sales could increase the cash gap if customers take longer to pay while wages and suppliers are paid earlier. The aged receivables report should be tied back to the ledger, with large or disputed invoices identified. Expected receipt dates should come from actual customer information, not the invoice due date alone.
Stock and work in progress need a separate look. Cash may already have left the bank for materials or partially completed work, while only part of the related sale appears in revenue. Deposits and prepaid costs can create a similar timing difference. The useful question is not just “how much stock do we have?” but “when did we pay for it, when can it be sold or billed, and when should the customer cash arrive?”
Supplier terms, wages, GST, income tax and other obligations have their own dates. Accounts payable can make this month’s bank balance look stronger even though the bills are still coming. Paying down loan principal or buying equipment also uses cash, but those payments do not pass through the P&L in the same way as ordinary operating expenses. Owner drawings or distributions must be identified rather than buried in a general transaction category.
Each of those facts points to a different discussion. Slow customer payments, excess stock, a one-off asset purchase and a margin problem are not interchangeable. The records have to show which explanation is present before the owner changes prices, cuts spending, borrows or accepts more work.
Test the busy period before committing
Business.govt.nz defines a cash flow forecast as projected opening cash, income, outgoings and ending cash for future periods. It recommends using past sales cycles, allowing for growth and investment, and testing pessimistic, realistic and optimistic income estimates.
For this business, the forecast period should match the operating cycle. Weekly detail may be useful around payroll, tax and a concentrated order period; monthly detail may be enough further out. The starting bank position, expected customer receipts, supplier payments, payroll, tax, finance, equipment and owner distributions should all use explicit dates.
The lower-receipt case matters. If a major customer pays late, sales are lower than expected or stock moves more slowly, the forecast should show the lowest cash point and how long it lasts. Financial modelling guidance from Business.govt.nz supports using current financial statements, expected cost changes and likely sales movements when testing a project or expansion.
That model does not decide whether this owner should hire, borrow or take the next order. It makes the assumptions and timing visible so the owner and accountant can discuss the decision with evidence.
What to bring to the first cash flow review
A useful starting pack would include the recent P&L and balance sheet for the same period, bank and credit-card balances, bank reconciliation reports, aged receivables and payables, inventory or work-in-progress records, payroll dates, tax notices, loan schedules, planned asset purchases and known owner withdrawals or distributions.
Add the order pipeline, customer payment terms, expected receipt dates and the costs that must be paid before each job or order is collected. Note which figures are confirmed and which are estimates. If the source records are incomplete, Pillar’s Xero and accounting systems service can help define the clean-up scope before a forecast is treated as decision-ready.
Pillar’s business advisory service covers cash flow forecasting and performance review. To have a Pillar accountant check the records and decide what analysis is appropriate, use the published phone details or enquiry form to contact Pillar. The accountant should confirm the position from the actual ledger before the business makes a material growth, funding or distribution decision.