Cashflow forecasts are based on your ballpark estimates on how you believe your business will perform over the next 1-3 years.
They help us judge when our businesses will meet our financial goals, and also show us the ebb and flow of monies through our business on a monthly basis.
Overall, Cashflows help us with our planning. They help us eradicate surprises and, like the goals we created in workshop 1 Business Planning – From Idea to Action, they give us a baseline by which we can measure our success.
What follows is a very simple version of the cashflow forecast creation process, but it is sufficient for most first time small business owners who are preparing a Business Plan for themselves or a lender. For a more detailed look at the financial planning for a bigger or more established business, I recommend taking an entrepreneurially-focused accounting course or to talk to your Accountant.
In the following section we’ll look at 2 aspects of cashflow forecasting:
- How to prepare for creating your forecasts, what activities you need to have completed, and what figures you’ll need to have in front of you.
- What cashflow tables look like and how to complete them.
- How many years you should forecast and how to get them as accurate as you can according to your knowledge levels.
Let’s look at these one by one.
Before you begin this section, it is important that you have certain decisions made and data at your fingertips.
We have covered most of these items in the previous 3 Business Planning workshops.
For those we have missed, or in case you have not followed along with each of them, here is the full list of items you will need to have in front of you when you go to complete your Cashflow Forecasts:
- Firstly, know how much will you be charging for each service type or product you provide. If you have a lot of small products, you may want to group these into product types (eg bottles of vitamins, or engine widgets, etc) and use an average price.
- Next, estimate how many products or services you will sell per month.
- Production expenses for each service or product, come next. How much does it cost to provide an iteration of each product or service? Just think about the costs of production at this point. So the things you need to buy to make the product or provide the service.
- Now, decide what your monthly Marketing expenses. This is the amount you will be spending on your marketing efforts on a consistent basis.
- The next item is the monthly Maintenance or Operations expenses. So, anything you need to spend on a monthly basis to keep the lights on and the door open eg heating, lighting, snow clearance, cleaning services, etc.
- Next, let’s look at the cost related to staffing – including your own salary. If you have already accounted for staff costs elsewhere (Operations for instance, or even cost of production) don’t repeat yourself. Choose the best place to add these costs in. Remember to include an additional percentage to cover payroll taxes.
- Make sure you also know what your Start-Up costs will be, including your 3-6 months of Operating costs. Include your Source of Funds table so you can itemise any up front payments you are providing or borrowing. If you are borrowing money, either from a Line of Credit, a personal source, a bank loan or grant, partner, etc. Have a note of how much that will be and when you will be drawing on it.
- Finally, have a your schedule of activity in front of you. This could either be due to seasonal restrictions to your business (landscape services or if you know you will be out of the area for set periods of time and your business will go on hold) or when you are actively promoting your business with marketing activities (Mother’s Day promotion, or Christmas Sale, etc).
Note: Once again, if you have completed the Business Plan step-by-step up to this point, you will already have calculated the majority of these costs, and it is now simply a matter of organizing the data. If you haven’t got any of these items, go back to the relevant workshop either Business Planning 1 – From Idea to Action, 2 – Marketing Basics, or 3 – Operations Planning, and review.
Now let’s look at how you use this data.
Now that you have gathered all the information you need together, it’s time to complete a generic Cashflow Forecast spreadsheet for Year 1 of your business.
It’s a little difficult to see the detail from the slide, so I suggest you download from the notes to take a good look. It is in a simple PDF format and is not meant to be used as a working spreadsheet, but it will give you a place to start: Cash Flow Forecast
However, let’s run through each element of the table right now.
Starting date: It probably makes most sense to start the forecast when you open your business so that you can account for a whole year. Alternatively you could begin it at the start of your first fiscal year.
Starting cash (beginning of month): For the Year 1 forecast, the starting cash/beginning cell is where you would input the monies that you are investing in your business minus any loan or line of credit proceeds that we’ll add on a separate line. Moving on, the starting cash/month cell will be automatically filled with the Cash on Hand (end of month) total from the previous month.
Now let’s look at money coming into your business classified as CASH IN:
Sales: This line is for the value of sales you estimate you will make in each particular month. You can either leave this as one line (ie total sales across all your products and services) or you can add lines to the spreadsheet to account for a breakdown of your products and/or services.
Other receivables: This line is for loan, grant, partnership deposits, or line of credit lump sums you receive as either part of your start up or once your are up and running.
TOTAL CASH IN: Adds together all of the incoming cash and presents as: Total cash available
Now, moving down the spreadsheet, we’ll look at how the cash flows out of your business on a monthly basis or CASH OUT:
Tools/equipment: Monies spent on tools, equipment, or other large assets like vehicles. You may also want to add major furniture or IT purchases here that you will just be using for business use.
Product/Service Supplies: Monies spent on the production of your goods or services.
Property Costs: Monies spent on lease holds, rents, or mortgages that are solely associated with your business. If you work from home, you may want to just use the utilities line below, or change this line to make more sense to you. Also the line for improvements to premises to run your business.
Utilities: Costs for heating, lighting, phone, etc.
Automotive: Gas and maintenance costs for the vehicle you use for work.
Administrative supplies: Office supplies, software costs, small furniture or equipment, etc.
Advertising/Marketing: Regular investment into your marketing (you may choose to put website costs/administration into this section, add to Admin, or Professional Services, create a separate line altogether – just be consistent on all forecasts).
Staff Costs: Payment and taxes for personnel, including contractors.
Borrowing Costs: Loan repayments and associated fees.
Bank Charges: Charges on business bank accounts and other fees used for processing customer payments.
Owner’s Salary: Amount you will be paying yourself.
Professional Services: Accountant, Bookkeeping, Legal fees. Potentially website management fees.
Other expenses: Edit and use these extra lines for additional expenses you wish to itemize – or add your own.
TOTAL CASH OUT: Finally we’ll see how much goes out of your business in expenses each month, and how much you are left with, Cash on hand (end of month). Cash in hand will then form the input into the following month.
Cashflow Forecast for Years 2 and 3: Once you’ve completed the Cashflow for Year 1, create a new spreadsheet, mark it Year 2 and transpose the final Cash in Hand Total for Year 1 into the Starting Cash cell for Year 2.
Just a few more notes on the creation of the Cashflow forecast:
- Always put expenses and sales in the appropriate month. This means account for any seasonal variations in sales appropriately. Don’t adjust the sales to reflect an equal amount in each month if your business is closed for a portion of the year. The idea is that you can see the monthly ebbs and flows of your business and plan for months when income could be a bit low or even push you into the red. Do the same to reflect periods of promotional activity and ensure that if you expect more sales, there is an increase in your expenses to provide those sales.
- Be prepared to justify the expenses and income figures to a financial institution if you are looking for a loan or grant.
- Be prepared to explain any assumptions that you made to help you come to the conclusions you have (we’ll review this shortly).
- Be prepared to prove the cost of any equipment, machinery, or services you will be purchasing or utilizing in your startup costs, especially if you are asking for loan funds to pay for it, so keep all your receipts, invoices, and quotes.
Now let’s consider the years we need to forecast and how we do that.
Unless you are basing your figures on existing sales/expenses or using figures supplied by a similar business, be aware that for the cash-flow forecast sheets you will need to provide your “best guess” or ballpark in terms of the income you will be generating.
This is expected and understood by financial institutions. However, you must be able to support your guesses with real research into similar businesses, logical assumptions, and demonstrable knowledge of your industry – so wild guesses are not acceptable here.
We’ve already talked in previous workshops about the importance of researching your industry to provide as much accuracy to your business idea as possible. This concept continues when coming up with the figures on your Cashflow sheets. From deciding how much to charge for your services, to estimating the pricetag on that new desk, it’s important to be as accurate as possible.
Where accuracy is in doubt, you can make (and explain) an Assumption you need to make as part of this process. We’ll talk more about making Assumptions in a moment.
For now, let’s focus on a couple of elements that make our Cashflows more useful both for our own planning, and for submission to a financial institution if you are looking for funding.
Let’s start by looking at how many cashflows we should prepare.
Preparing individual cash flow forecasts for the next 3 years makes a lot of sense. It’s unlikely that you will end your business after the first year (most people are just getting into the swing of things at that point), and looking further than 3 years ahead, for a start up, is likely to be a waste of time as new businesses tend to quickly evolve over the first few years.
3 years is a comfortable place to be. We can look at our first year with a fair degree of accuracy and then build on that depending on the business goals with set ourselves previously. We also should expect to see ourselves making money after 3 years of business – something that isn’t always possible in the first year when you are trying to establish yourself.
When looking ahead, think about what will change from year to year.
- An increase in sales as word expands about your business and your marketing takes hold.
- Expansions into additional locations, new product lines, additional services.
- Taking on additional staff or adding new equipment, or upgrading what you have.
- Maybe you will start paying yourself more – or finish paying off that short term loan you took out to get you started.
With all this expansion, there will, of course also be more expenses too, so make sure when you look ahead you take into account both growth and expenses.
Note: If you are applying for funding for an existing business, a bank will want to see your forecasts, but you should also provide at least 2 years years of balance sheets for that business as an appendix, as well as any other supporting financial information about the business your lender requires.
The other aspect of creating cashflow forecasts to consider is your personal confidence level in your business.
All business owners are confident their business will be a success, of course, or they wouldn’t start them, but you may be more cautious by nature than others and so will assume your business will be slower to get started. Or else, you may be super confident (maybe you already have several contracts being pushed your way) and so you think you will expand quickly.
In order to establish your confidence level (and also to submit cashflow forecasts to a bank you can stand behind) it’s advisable to create 3 versions of your cashflows: best, worst, and midpoint scenarios.
- Best is when your confidence is high, the market looks good, you’ve tested your product and people are clamouring for it. You think you will expand quickly and so you reflect this in your cashflows.
- Worst is when you believe a slow growth will make you more comfortable (maybe you don’t have that much time at the beginning for your business, or you want to test your services a little more before fully commiting to a full time operation). Alternatively, Worst is when the market unexpectedly falls – or an issue like COVID 19 hits and you can’t operate consistently. Another way to look at the Worst scenario jis that it measures the lowest level by which we can still stay in business in hard times.
- MidPoint is exactly that, somewhere in between the Best and Worst scenarios.
Which figures you then choose to submit in your Business Plan will depend on your own gut feel, experience, confidence in the project, and willingness to take on risk—but your lender may wish to see all three. My recommendation is that you also prepare all 3, at least for the first couple of years, even if you don’t submit them, so that you have a real handle on understanding what that Worst scenario looks like should you be in the unfortunately position of heading towards it!
Of course, we don’t want that to happen, and spending some time considering how to prevent that Worst scenario is the final thing we will look at today: Risk Analysis.
But first, in the next video, let’s look at creating our Statement of Assumptions.