A sensible, realistic cash flow forecast is vital if you want your start-up to succeed. But when you're just starting up, it can be difficult to know where to begin.
Try to remember that a cash flow statement is driven by two things: organisation and planning. Here are three simple steps, and one big tip to help you start off on the right foot.
1. List your start-up expenses
Make a list of all the one-time start-up expenses that you have paid or expect to pay. Begin by looking at the cash you have in hand - this could be money you've invested in the business, cash in the business bank account, loans that you've received, or an investment from a partner.
Think about incorporation fees, legal and accounting, software licenses, website design, premises fees, marketing materials and advertising, office supplies, furniture, equipment, and so on.
2. Determine your monthly expected cash sources
These can be projected sales, loans that you know are coming in on a certain date, or investments from partners. If you're a new business, you might want to forecast sales conservatively (far better to outperform expectations and have a better inflow of cash than you projected than to come up short).
If you've already started your business, or are purchasing a going concern from someone else, you have a distinct advantage: sales history. History can't totally predict the future, but it can paint a decent picture of what you can expect to happen, and what business changes you might need to make.
3. Assess your monthly expenses
This can be a bit tricky, because it's easy to overlook things and get a surprise you really don't want.
Monthly expenses to factor in might include your rent or mortgage, insurance, marketing, website hosting, travel, utilities, payroll, inventory, taxes, loan payments, working capital, and last but not least your own wages.
Remember: stay honest and objective
Do your homework and get accurate estimates of costs. If costs look high, simply projecting more sales (when you don't have the capacity to chase and close them) won't fill that proverbial water tank.
So perhaps you tighten the outflow. What can you reduce or cut? For example, if you need a creative studio, maybe you rent a more modest 500-square foot space instead of the open, airy 1,000 square footer.
Remember, you will be able to use your cash flow statement not only to analyse your sources and uses of cash from year to year, but also from month to month if you set up your accounting system correctly.
You will find your cash flow forecast to be an invaluable tool in understanding the hows and whys of cash flowing into and out of your business.
Sponsored post. Copyright © 2018 Wesley Rashid, co-founder and CEO of The Accountancy Cloud