Cash Flow 101 for Sole Traders: The 4-Number System That Keeps You Solvent

Most sole traders don't go broke because their business is bad. They go broke because their cash flow is bad – which is a different thing. You can be booked solid, have a full pipeline, and still be unable to pay the GST.

The good news: understanding cash flow doesn't require accounting training. It requires four numbers, checked once a week. This is the system.

The four numbers

1. **Money in.** Cash actually in your business bank account today.

2. **Money owed to you.** Sum of all unpaid invoices.

3. **Money you've committed.** Bills, subbies, materials, GST, wages, lease – everything you're going to have to pay in the next 30 days.

4. **Your buffer.** The difference between (money in + money owed) and (money committed). Ideally, this is positive. Ideally, it's positive by at least one month of committed costs.

That's it. Track those four numbers weekly and you'll spot cash flow trouble weeks before it hits. Ignore them and you'll find out when the direct debit bounces.

Where most sole traders get it wrong

They look at "money in" and "money owed" and feel good. Six grand in the account, twelve grand owed – sweet, eighteen grand total. Buy the new nail gun.

Then the GST bill lands, the subbie needs paying, the van lease comes out, and the six grand is gone. The twelve grand owed is still owed – in fact, half of it is now overdue. And the new nail gun is on the credit card.

The fix isn't more money. It's seeing the full picture.

A simple weekly routine

Sit down every Friday afternoon (or Monday morning) for 15 minutes. Open Xero or your accounting tool. Write down:

- **Money in:** [bank balance] - **Money owed:** [total of outstanding invoices, overdue and not] - **Money committed:** [bills + GST + wages + lease + subbies + materials, next 30 days] - **Buffer:** (money in + money owed) minus money committed

Aim for buffer = 1 month of committed costs. Below that, you're stretched. Below zero, you've got a cash flow problem this month, not "soon."

What drives each number

**Money in** is driven by how fast your clients pay. This is the lever most tradies under-use. The difference between getting paid in 14 days and 35 days, across a year of invoicing, is roughly two months of cash flow breathing room. Automating follow-ups is the single biggest win here – tools like TabNudge, which plug into Xero and chase invoices the moment they go overdue, typically pull days-to-payment down by 40-60%.

**Money owed** is driven by how many invoices you're running at once and their average age. If your money owed is growing faster than your money in, you're issuing invoices faster than you're collecting – which is usually a follow-up problem, not a workload problem.

**Money committed** is driven by how lumpy your costs are. GST is a big one – a $6,000 quarterly GST bill can wipe out a good month if you haven't set it aside. Most tradies do well to sock away 15-20% of every payment into a separate GST account the day it hits.

**Your buffer** is driven by discipline. Pay yourself a steady salary, not whatever's in the account. Keep 4-8 weeks of committed costs in a separate account untouched. Replenish it before you reinvest in gear.

Three habits that build buffer fast

1. **Deposits on every job over $1,000.** 30% up front. This is the single biggest lever for cash flow in small trade and service businesses.

2. **Invoice the same day.** The day the job finishes, the invoice goes. Not tomorrow, not Friday, not when you do admin on Sunday. Same day. Xero's phone app lets you do this on the site before you drive off.

3. **Automate follow-ups.** If your "money owed" number includes a $4,000 invoice that's 40 days old because you haven't chased it, that's $4,000 of your buffer locked up in someone else's bank account. Set up a cadence once and it handles itself.

The GST trap

This one deserves its own paragraph. GST is not your money. When a client pays you a $1,000 invoice and $130 of that is GST, you owe $130 to Inland Revenue (NZ) or the ATO (AU). Spending it on materials or your own pay is the road to a GST bill you can't cover.

The cleanest fix: every payment that hits your main account, move the GST portion to a separate account on the same day. Automate it if your bank supports rules. Treat the GST account like it isn't yours – because it isn't.

What solvency actually looks like

A sole trader with healthy cash flow isn't necessarily the one making the most money. It's the one who:

- Checks the four numbers every week. - Has at least one month of buffer. - Takes deposits on bigger jobs. - Invoices same-day. - Has an automated follow-up process so overdue invoices don't hide. - Keeps GST in a separate account.

None of this is complicated. Most of it is free. All of it becomes second nature after a month.

Spend 15 minutes this Friday. Write down your four numbers. If they're healthy, reward yourself with a coffee. If they're not, you just found out before the direct debit bounced – and you've got a full week to do something about it.