This series of exercises will help you to better understand your cash flow and budget.

Exercise 1

You expect contracts and assignments over the next six months which will be billed (plus GST) as follows: April $6,000 – May $3,500 – June nil – July $4,000 – Aug $5,000 – Sept $7,000. You expect payment 20th the following month.

Where will these appear on your budget and cash flow forecast? What’s the average monthly earnings expectation and will that be enough to ‘make ends meet’?

Answer: Average earnings before expenses and tax is $3,667. See table below for Budget/Cash flow spread.

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Exercise 2

If you plan to send a $6,000.00 invoice to a client in April and don’t expect to get get paid until May, in which month should you Budget the income (and how much?) and in which month should you forecast the cash flow (and how much)?

Answer: Profit & Loss Budget $6,000 in March; Cashflow forecast $6,900 ($6,000 + GST) in April.

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Often cash will flow out immediately on big ticket items (e.g. plant and equipment), which is a cost/tax deduction that gets spread over several years (referred to as depreciation). The expenditure for tax deduction purposes is the ‘depreciation’, not the full cash cost.

Exercise 3

If you plan to buy a camera for $750.00 (plus GST) in April and pay cash, where should you show this in the forecasts?

Answer: Profit and Loss Budget monthly tax deductible depreciation (at tax depreciation rate of 40% pa) $300 pa; Cash Flow Forecast of $862.50 outflow in March – but $112.50 will flow back later in a GST reclaim.

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Sometimes you incur business costs on ‘time payment/credit’. Just because the cash hasn’t all left the Bank account, it doesn’t stop an expense claim (or a full GST claim) for the full amount.

Loan repayments for hire purchase or a bank loan typically have both a principal and an interest element in each instalment. The full instalment is a cash outflow, but only the interest portion is (tax deductible) expenditure.

Exercise 4

You plan to buy a computer in June (for business use) for $3,000.00 (GST Inclusive) and arrange to pay it off in monthly cash installments over three years $109 per month inclusive of $26 interest). When do you reclaim the GST?

Answer: Whilst the cash flows out in future monthly installments, a GST reclaim can be made immediately on the full purchase price (3/23 of $3,000 = $391).

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Let’s see if you “get it” - cash flow vs budget, that is.

Exercise 5

In addition to the transactions mentioned in the exercises above, picture yourself beginning the financial year with $500.00 in your business bank account, realising there’s not enough funds in April to draw for personal reasons (indeed you need to put $1,000pace from your savings into your business account); you rent studio space  from another commercial business at $150 per month; you need stationery costing $250; you need part time help (typically $400 wages per month); and you need $2,400 per month for personal expenses. from your savings into your business account); you rent studio s

What will your forecast cash balance be at the end of 6 months? And what will be your taxable earnings?

Answer: Cash = $5,469; Earnings = $21,774.

See the attached schedule [PDF].