Gush - whoops, now it's a drought

It’s important to take control of your financial destiny – if you don’t who will? Accountant Russell Toplis explores cash flow monitoring and budgeting to help.


Commissions and contracts, the life of a freelancer, can create uneven income. Sometimes flush while a contract is underway, sometimes lean when there’s not much happening, it’s important that you know where your money comes from and where it goes. This is what cash flow is all about.

Accountant Russell Toplis explores cash flow monitoring and budgeting to help you understand what is happening with both your income and expenses. Knowing where you are, will help you know where you are going and smooth out your income.

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Money management may not be dear to many creative hearts but there are a number of compelling reasons why you should know where you and your business are financially.

  • It will help you plan the growth of your creative business and manage your finances.
  • You will see when you need funds from sales or cash injections to keep your business going.
  • If you are seeking financing like a bank loan, a cash flow projection will be required of you.
  • With a cash flow budget you should be able to minimise financial ‘surprises’.
  • It will force you to look at where your funds are coming from and what you are spending it on

Now you know the why, let’s talk about ‘cash flow’; and while wading through that, let’s see what we need to know about budgeting.

Cash flow is the simple term used to explain what’s been going through our bank account; and in the business world we tend to associate the term with what we expect to flow in and out of our bank account in the future. So a “cash flow forecast” (something banks often ask for when we need financial assistance) is simply us trying to predict the transactions that will appear on our bank statements in the future (usually month by month, for one year at a time).

Ideally we list the predicted cash flows, and as each month passes compare expectations with actual results so an informed decision can be made about how to handle the unders and overs (not enough money or a surplus). This shows your real money picture and lets you see where, and most importantly when, the lumps will occur.

OK – that’s straight forward. But how do we work out the unders and overs?

That’s where a budget is needed - often referred to as a ‘Profit and Loss’ forecast.

A budget is where we list our expected income and expenditure in an attempt to predict our future net earnings and get a handle on what our tax bill might look like. We’re trying to forecast what we’ll be telling the tax department at the end of the financial year.

The important difference between a budget and a cash flow is that a budget doesn’t take into account the timing difference of earning income and getting paid later, nor incurring expenditure and paying later.

Here are some strategies for those of us with 'lumpy' earnings:

  • Have a cash flow projection and USE it. It’s good practice to schedule out the monthly expectations of earnings/expenditure and the related receipts/payments (cash flow) so that we can tailor our personal need drawings with our wants. Moreover see if an overdraft facility is needed to bridge the drought months while waiting for a splash to rebalance the books.
  • In times of 'flood' put excess money into a separate account and only touch it if a 'drought' begins. Because you've done your cash flow, you will know what your needs are as well as your wants.
  • Draw cash for personal costs for only what’s needed. Our budget will point the way to how much tax needs to be put aside. Our cash flow forecast should highlight GST payment/receipt timing and bank repayments.
  • Save your tax money as you go - or pay as you go. You may initially pay IRD more than you need but you should get a refund when you file your tax return - regard it as compulsory savings.
  • When the money is running out, cut back on costs. Are there business and personal costs you can rein in?
  • Consider an overdraft or a loan - just remember you need to pay it back and pay interest as well. Avoid using your credit card as an overdraft. The interest could cripple you.
  • Banks make money from their lending. If we can demonstrate to ourself and the bank our likely needs and how any loan should get repaid, then arranging such fiancé should be easy.
  • Longer term, if lumpy earnings are expected, then we should attempt to negotiate contracts to try and spread income as evenly as possible over financial years in an effort to avoid being taxed at the highest rates in one year, and avoiding the lower graduated tax rates in the lean years. Budgeting our expected ‘Profit and Loss’ should highlight a call to action on this.

So, with an understanding about cash flow and budgets, and some money management strategies, let's roll up our sleeves and get to work!

Written by

Russell Toplis

11 Jun 2013

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