How to be Cash Flow Confident – A Case Study

How to be Cash Flow Confident – A Case Study

Do you know that cash flow is not the same as profit? 

Let’s face it, accounting can be confusing at the best of times. That’s why it is important for you as the business owner, to understand the key financial ratios, reports and also, how to forecast cash flow. After all, how can you improve your profit if you don’t have a handle on cash flow and the numbers behind it.

Cash flow is the lifeline of your business. Without consistent, solid flowing cash flow, you will be constantly chasing your tail in managing income vs. expenses. You will have trouble setting aside funds for working capital, you will experience a reduced ability to borrow, and your business will struggle to grow.

Understanding the true costs of running a business and the factors influencing cash flow and profit 

We recently advised a wholesale business that was experiencing large fluctuations in its sales, profits and cash flow. The business supplies goods to rural businesses and carries a large amount of stock and has significant credit accounts with its customers.

Recent Covid-19 events resulted in significant stock write-offs. The owners, Daniel & Tracy, wanted advice on how to improve their profit, better manage their cash flow and prevent the loss of income from future unplanned events.

However, there were some key issues the clients had to solve. To begin with, they did not know what their break even sales level was. They did not understand the benefits of ratio analysis and budgeting. They lacked working capital and they had inadequate business insurance.

Combined with these issues, Daniel & Tracy wanted to sell the business and retire within 12-months. In order to get the value they wanted from a potential purchaser, they needed to sort these things out.

Here’s how we resolved the issues for them

  • Breakeven Sales 

The first step was to establish the breakeven sales point so that they would know exactly what they had to bring in each week in terms of sales to break even. 

To achieve this, we reviewed their fixed costs which when totalled, came to $350,000.

Then, we reviewed their gross profit margin on all products and determined an average of 55%.

This determined that our minimum weekly sales required was $12,250.

  • Improving Profit 

To better manage their stock, we completed a series of key profit ratio calculations with Daniel and Tracy. This included Gross Margin Return on Inventory and Gross Profit Margin. We suggested to Daniel and Tracy that they upgrade their stock management system to improve their gross profit margin and to reduce shrinkage.

  • Improving Cash Flow

In order their improve cash flow, we completed a series of cash flow ratio calculations. This included Accounts Receivable, Stock Turnover and a Funds Statement. It was agreed that Daniel and Tracy would prepare a cash flow budget every six months to determine their funding requirements, until such time as they sold the business.

  • Improving Funding 

We were able to negotiate an extension on Daniel and Tracy’s business overdraft limit to meet their working capital requirements. Note: this would not have been possible without determining their key financial ratios and producing the cash flow reports to show the lender.

  • Improving Insurance Coverage 

Daniel and Tracy were woefully under insured and this oversight had cost them dearly. We analysed their coverage and determined that they were without Business Disruption Insurance. We promptly organised the appropriate cover to prevent the business from a loss of future income. 

 As you can see from our case study, there is a lot to be mindful of in being cash flow confident. 

Daniel and Tracy saw an immediate improvement in their cash flow position as a result of the recommendations we made. Fortunately for them they listen to our advice and have gone one to achieve their business goals and succession objectives.

Get in touch

If you are confused by accounting and not confident about your cash flow management, or feel like your finances are getting out of control then get in contact with us today via email to organise a free no obligation chat. Also, If you need an accountant in Auckland – feel free to reach out. We will listen and then formulate the best strategies to help you achieve your goals. Alternatively, click on the Book A Call button now to get started.


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Insight CA Limited is a team of experienced Auckland-based chartered accountants and business advisors who can help. We’ll give you the power to see what’s really happening in your business, so you can take control and start making progress. Click here to learn more about how we can help you achieve your goals.

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