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How to make a cash flow forecast as a startup

August 6, 2018

How new business owners can produce cash flow forecast

How can I forecast my cash flow when the business doesn’t even exist yet?

That’s a question most new startups wrestle with as they are planning their new business. It may seem to some to be an impossible task, so we asked Robin Booth of Brixx.com to show how you can produce a cash flow forecast for a new business.In this guide I’m going to get right back to the basics of cash flow forecasting for startups. No prior knowledge is required, and I’ll try and keep it brief.

I’ll tell you why cash flow forecasting is important, how to forecast your cash flow as a startup and how to make flexible forecasts that you can test and ask meaningful questions of.

It sounds like a lot of work, especially if this is your find foray into understanding the financial side of your business. But it’s a lot easier than it sounds. With the right tool and a level-headed attitude towards the sums of money your business will generate, you’ll have a good cash flow forecast in no time.

Why is a cash flow forecast important?

Predicting cash flow incredibly important, especially for small businesses. Because if you get paid late, or have to pay unexpected costs up front, it can leave you with a dangerously low amount of cash in your pocket.

The solution to these potential cash flow problems is to try and predict them and take steps to stop them from happening. This is cash flow forecasting.

There is always a certain element of educated guesswork to forecasting but this does not make it any less important. Being able to foresee the potential pitfalls ahead could save your business.

But it’s not just a risk avoidance exercise. Understanding your future cash position equips you to make better decisions now about how to grow your business, the kind of improvements you can afford to make in the long term, or extra staff you plan to take on.

To answer these questions effectively, its best to have a flexible plan that you can easily make changes to rather than a spreadsheet. Below I’ll show you how to use Brixx, a free cash flow forecasting tool, to make a plan of your business.

How long should my forecast be?

For many startups, the first year of operation is a learning process – where ambitions and planning meet reality.

As a new business, your startup will grow over time – in most cases you won’t get the business where you want it to be within 12 months. This isn’t pessimism, it’s just the way things are for most businesses.

Whether they require development time, fundraising time, or need time to gain a solid customer base, the first year or two of a business is likely to be very different to the following years.

Planning for at least 2 years is a good starting point, as this should give the business time to grow from its infancy into a self-sustaining organisation.

How to forecast a startup cash flow

There are so many ways you could start your cash flow forecast – and most of them are just as good as any other. I’m going to take you through how I do it:

  1. What am I going to sell?
  2. What are my costs?
  3. What do I need to buy?
  4. Funding the business

1. What am I going to sell?

Let’s tackle the important question first. What you sell, and how much you sell, will determine the success of the business. How can you predict this if the business hasn’t opened its doors yet?

Overestimating sales is the cardinal sin of startups. It’s great to be optimistic, to have drive and motivation – but while this attitude is invaluable when talking to people about your business and enthusing them, it is best left at the door when you start making a cash flow forecast.

Because, and here’s the kicker, it’s your business and your livelihood (and maybe others) that depend on the business. Be realistic in what you can achieve – it will pay off with less stress, debt and false starts down the road.

To forecast your sales simply and effectively, create a list of the types of products and services you are going to sell.

estimating sales for cash flow forecast

 

Then for each one, estimate the volume of you expect to sell each month, and the price you will charge for the product or service.

forecasting sales for cash flow

If you get paid late then delay when the payment is made – you might only be paid a month after the transaction, for example.

In other cases you might assume that most of the cash you are owed will be paid within a month, but some could take up to 3 months after the transaction.

sales income for cash flow forecast

It may seem like a small thing – but the timing of cash flow is so important for young businesses.

2. What are my costs?

Compared to income, costs can be quite easy to forecast. Many bills are static, unchanging amounts that just repeat monthly, quarterly or annually. The difficult part of forecasting your costs is remembering them all!

The first type of cost are costs directly related to selling a product or service – be this an online transaction fee or the cost of raw materials required to create a product.

These costs will rise along with your sales – so it’s good practice to estimate them either as an amount for each unit you sell, or as a % of the sales value of your products/services.

forecasting costs of sales

Once this is done, make a list of every other cost that your business will incur. Research how much these costs are likely to be and how often they need to be paid.

Divide your costs into different groups to help you see how much each type of cost will affect your business. Here’s an example:

forecasting operating costs

By listing all of these costs, and setting the dates that they start and end on your Timeline, you will get a full picture of how much the business will owe and when.

estimate costs for cash flow forecast

Don’t forget to include staff salaries, and the extra costs around employing people, such as NI and pension contributions.

staff costs for financial forecast

3. What do I need to buy?

You will need to buy a surprising amount of stuff when you start a business. Even a bedroom ebay business needs a smartphone or computer, supplies for packaging and labeling and some form of storage.

Meanwhile a high street enterprise like a cafe requires refrigeration units, counters, lighting, decoration, tills, cash machines, cups, cutlery, toasters, wi-fi routers, cabling, toilet facilities, sinks, flooring… the list goes on.

Your business might be somewhere in between. Most businesses require a large amount of up-front spend to get started – and a lot of this is buying the equipment that makes the business function.

Make a list of each item you need, it’s price, and how long you think it will last before it needs replacing. Here are some examples of things your business might need to buy:

estimating asset purchase for cash flow

Having enough ready cash to replace or repair a faulty or worn piece of equipment is an important part of your cash flow planning.

3. Funding the business

By now you should have a reasonable picture of the cash inflows and outflows that make your business tick.

Adding all of your monthly income together, and the taking away your monthly costs will produce an Operational Cash Flow – the amount you have left over each month after paying the running costs of the business.

If this amount is ever negative, you won’t have enough cash to pay your bills (or salaries) and so other sources of funding will be necessary.

Every business starts with some money in the bank. It could be from:

  • Owner’s investment into the business
  • Funding from investors
  • Borrowing (loans etc)

First, record the sums of money the business has right now and their sources.

cash flow forecast funding needs

One of the first things you will notice is if your plan requires extra funding.

If so, you will need to find additional sources of funding – be these loans or external investment into the business. Add these into your plan and adjust them on the Timeline.

estimating finance needed with cash flow forecast

Dashboard and reports

Brixx puts all of these elements of the business together into charts and financial reports, producing a testable, flexible financial model.

cash flow shown in graph

When viewing the reports or dashboard created from your plan you can drill down into the figures presented to reveal the items you have added to your plan.

Here is an example of the Cash Flow report, which can be drilled into to show the breakdown of cash received from different Income components in the plan.

detailed cash flow report

Cash flow forecasts, as I mentioned above, are critically important for small businesses, especially when they are still growing. But they are also easier to create than you might think.

By splitting out the different sources of income and cost the business will receive and incur, it’s possible to cash flow forecasting a relatively simple process.

Arguably the most difficult part of making a cash flow forecast is making it realistic – not overestimating your sales or underestimating your costs.

About the author

This article has been written exclusively for ByteStart by Robin Booth of Brixx.com the financial forecasting app that turns your ideas into numbers. Robin is a regular ByteStart contributor, and other articles he’s written to help business owners to get to grips with forecasting include;

Business planning – Further Resources

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