Imagine taking the latest valuation of your house to the bank to pay the mortgage. The property has gained $200,000, but the bank still wants Thursday’s instalment in dollars, rather than evidence that you are doing well on paper.
A profitable business can find itself in much the same predicament. The profit and loss account records a healthy margin on work you have delivered, while the money sits in customers’ bank accounts, inventory, or debtors ledger, and your overdraft approaches its limit.
Then a major customer stretches payment from 30 days to 60 because their own funding has tightened. Your bank declines to extend the overdraft, a supplier demands payment before dispatch, and suddenly the business that looked comfortably profitable cannot fund next week’s wages.
The profit may be real. So is the cash crisis, and management cannot resolve it by pointing more emphatically at the profit line.
As SME owners review their plans for 2027, optimism will earn its usual place at the table. It deserves one, because nobody builds much by assuming failure, but it should bring evidence and explain how it intends to pay the bills.
The world offers plenty of reasons to challenge the assumptions. Geopolitical conflict can turn into higher freight, fuel and input costs, while a currency movement can undo the margin on an order you quoted months ago.
Locally, inflation and interest rates have again complicated the arithmetic. Annual headline inflation reached 4% in August, and the Reserve Bank lifted the cash rate to 4.6% in September. Neither number tells you exactly what will happen to your business, but both deserve more attention than a footnote in the budget.
Meanwhile, the capabilities you need keep changing. AI promises faster work, but someone must choose the right applications, fix the underlying processes, train the people and check the results. The subscription may cost very little compared with the time needed to make it useful.
Finding good people remains difficult, and keeping them requires more than an annual pay review. Cut training, supervision and equipment to protect this quarter’s result, and you may damage the very capability on which next year’s growth depends.
Governments face their own pressure to demonstrate action, and another rule often provides a more visible response than removing an old obstacle. Whatever the merits of an individual measure, owners must find the time and money to comply, usually from resources they had already allocated elsewhere.
These forces do not arrive neatly, one at a time. A customer delays a decision, a supplier changes payment terms, and a key employee leaves while you are still funding the stock for the order you expected to win.
This is where the old-fashioned cash flow forecast earns its keep. It forces the conversation out of percentages and into amounts, dates and consequences.
Profit matters, but it does not pay Friday’s wages until customers turn it into cash. Growth can deepen the problem when you buy materials, recruit people and carry additional stock before the proceeds arrive.
Consider a business expecting $100,000 in monthly customer receipts. If customers consistently pay a fortnight later, it may need roughly another $50,000 to fund that delay, even if sales and margins meet the plan. The profit forecast can look perfectly respectable while the bank balance tells a different story.
A useful forecast starts with uncomfortable questions. Which customers will buy, why will they choose us, what margin will we retain, and when will their money actually arrive?
I am a great fan of Peter Drucker’s test: “If we did not do this already, would we, knowing what we know, go into it now?” Apply the question to the activity behind every expense, rather than simply debating the amount. Would we buy this software, retain this service, attend this exhibition or continue this product range if we faced the decision afresh? “We spent it last year” explains the history, but offers no commercial justification for a repeat.
A “no” demands a decision: make it. This discipline challenges habitual spending without turning the exercise into indiscriminate cost cutting.
A sensitivity analysis that reflects differing drivers of cash flow is essential. A deeply considered best case, worst case, and forecast you can live with will build confidence in the numbers. Do not allow a spreadsheet to replace active and realistic consideration of each item. It cannot rescue weak thinking.
Use a rolling weekly forecast for the next 13 weeks and a monthly view through 2027. Connect both to the sales pipeline, staffing, purchasing, tax obligations, loan repayments and planned investment, then compare the forecast with what actually happens.
The point is to agree decisions before pressure makes them for you. Set the cash buffer that triggers a review, the evidence that releases the next investment, and the conditions under which you need to reconsider previous choices.
Owners still need ambition, judgement and the willingness to take a calculated risk. A rigorous cash flow forecast helps them decide which risks they can afford and which assumptions they must test first.
Bring optimism to the planning meeting. Ask it to bring a cash flow forecast.
