Are you looking ahead to your first six months in business? There’s never been a better time to build your first cash flow forecast.
Quick takeaways if you’re in a hurry
1. Controlling the finances of your business is fundamental to your success
2. A business plan will provide the foundations for your cash flow forecast
3. If you regularly review and update your cash flow forecast, it can be made central to your business decision making processes.
Read on: Create a cash flow forecast for start up business success
There are a wealth of plans and strategic documents that need to be prepared when you start your own business: even if you don’t require funding from an investor or the bank. It’s important not to overlook the importance of the cash flow forecast.
Cash flow forecasting establishes your current financial position and tracks it forward, taking into consideration planned activity and expected sales. It allows you to prepare yourself for times when your business is going to be short of cash, and it also allows you to optimise the opportunities in times when cash reserves are strong.
What are the benefits?
Cash flow is one of the major causes of stress in new businesses. Having a clear understanding of your cash flow position allows you to maintain control and reduce your stress. A cash flow forecast ensures that as a business owner your decisions are informed, and that your spend is managed to support your goals.
A positive side effect of proactively managing a cash flow forecast is that you also closely monitor the behaviour of your customers and suppliers. If your customers are late paying invoices or your suppliers start bending the terms of your agreements you will be able to react quickly to protect your cash position.
As a new business you will probably identify a wealth of opportunities to drive growth. Having a detailed understanding of the numbers that support your business will help you to ensure that you don’t ignore your day to day costs as you push for expansion.
How do you construct your cash flow forecast?
Identify the time period you would like to cover in your forecast. For a start up business, you will probably find that six months is a good option.
Outline your plans
Your cash flow forecast will be the financial mirror of the business activity you plan for the same period of time. This is where your business plan is essential to provide the foundations of your cash flow forecast. You can identify the revenue and costs that will be associated with delivering your business goals.
Your cash flow forecast will be more effective if your numbers are accurate. But as you’re running a new business you will probably have to estimate and guess a lot of the numbers that will populate your plans.
Make sure you keep a note of the rationale that you apply to the numbers you have calculated. Erring on the side of caution and building a buffer into costs is a good idea even once your business is up and running.
Forecast your income
At this stage you will probably already have outlined your sales targets for at least the first six months of operation. You can use these to create your income figures that can be added to your forecast. Take into consideration seasonality and go for the lower end of any estimates to give yourself maximum opportunity to overachieve on targets.
Outline your costs
By categorising your costs into variable and fixed categories, you make it much easier to outline the regular and one-off payments that your business needs to pay.
Fixed costs are unaffected by your sales levels and include one-off costs associated with starting your business. These could be items like equipment purchases or introducing a new vehicle to your fleet. Factor in costs like research and branding as well – these can have a big impact on both the costs and the revenue of your business.
Variable costs will fluctuate in line with your sales, so can be closely linked with your sales forecasts. These include elements such as stock, fuel, and raw ingredients.
Finally, review all the costs and make sure you haven’t missed anything.
Construct your cash flow forecast
There are many different types of cash flow forecasting software available, or you can keep it simple and just use a spreadsheet. Load in the information that you have gathered, and bring together the income and cost lines so you can see what your end position is going to be.
Use the cash flow forecast to highlight danger periods where your cash reserves are low or in a negative position. This is a good time to sense check that you are bringing sufficient start up funding to support the cost of operating your business in the short term.
If your cash flow forecast highlights an issue with your cash position then it’s important to take action. The good news is that the process of creating a forecast has given you time to react to the problem and build some solutions.
Review your costs during the time when you will be short of cash. Is there any opportunity to move payments to allow you to manage until you receive more income? If not, you might need to find some alternative income solutions such as invoice finance. Invoice finance can be a great solution to close the gap between issuing an invoice and being paid – allowing you to fill a hole in your cash flow position.
Keep it alive
For a cash flow forecast to bring real benefits to your business it needs to be constantly referred to and regularly updated. It can be a tool that allows you to plan for the future, and it can also provide you with an opportunity to review the past performance of your business and analyse the successes and failures you have experienced.
Sense checking your results against your forecasts will give you insights that will allow you to increase your forecasting accuracy in the future.
Building a cash flow forecast is an important investment in the future of your business. It puts you in control of your finances from the beginning, and ensures that your decision making is embedded in the financial reality of your business. By planning ahead for financial problems you have the ability to prepare solutions that will keep your business on track for success.
Invoice Finance, Cashflow Solutions and Business Loans
Fifo Capital are experts in cashflow solutions for small to medium business. Find out more about invoice finance and our fast business loans here: