How to create a realistic cash flow forecast
One of the most important things you are going to need to prepare in order to get financing for your new small business is a realistic cash flow forecast. With established businesses you have historical information that you can use to help produce more realistic cash flow forecasts, but when preparing a cash flow forecast for a start-up company all you have to use is your own estimates. Trying to make these estimates, especially the sales forecast, is the most difficult part of building your company's financials.
Here are some tips for creating a realistic cash flow forecast.
The first section of your cash slow forecast should be your pre-start-up position. This section helps to define and confirm the amount of debt and equity financing you will need, and what type of financing will be needed. You will also be able to see what initial amount of money will be spent and how much cash you will have left over to start your business. To figure out the total start-up cost you will need to add up the total cost of equipment, inventory, land, buildings, loan payoffs, and one time pre-start-up expenses such as pre-paid insurance or rent. Once you have added up all of these items you will need to deduct this amount from your available equity and loan start-up funds to determine how much cash you will have left over, if this number is negative you will be out of money and your business will not work.
The second section of your cash flow forecast is going to be your sales forecast, which will tell you if your cash flow will support your business. The first thing you have to do is to determine what your yearly sales will be. This information is based on numerous factors such as a favorable national industry outlook, a favorable economy, favorable competition in your local area, and many others that will help you determine if there is a positive outlook for your industry. Once you have determined there is a positive outlook you will need to take a closer look at your business to see how many customers you need to walk into your store each day and how much they need to spend on merchandise to meet your sales forecast. You also need to keep in mind that some products are more in demand during certain months of the year and if this is the case you need to do some research about your busiest time of the year and make appropriate plans for the other months so you don't run out of cash. If you are offering more than one product or service you should provide a break down of sales for each product and keep in mind that when determining your sales you should start off low and then work up as the months go by. You also need to take into consideration cash sales and credit sales, if you are doing credit sales you need to define your payment terms, such as thirty or sixty days.
The third section will be your cost of goods sold, which is the price you pay for your merchandise. You will need to include the dollar value and the percentage of sales that this cost represents. To determine the percentage you need to contact the supplier to find out how much you are going to pay and what the suggested retail price for the product is. Your percentage also needs to fall in the range of the industry average for your product, to find out what the industry average is you can consult with Robert Morris Associates or Dun and Bradstreet, which many bankers tend to use when financing business loans. You will also need to include your start-up inventory levels, which will also be included in your pre-start-up costs.
Expenses should be covered in the fourth section and should not be numbers pulled out of the air. You should figure out what you have spent in researching your business and have records to prove those expenses, such as a phone call, an informed estimate, a letter or any other reliable source of information for your type of business.
If you already have loans or credit cards for your business you need to figure out your monthly payment and break it down into what goes to principal and what amount goes to interest. This should be done separately for each loan or credit card you pay each month.
This is where the information from the first section will come in because here you are going to want to include all of your capital purchases and start-up costs that you have paid for with cash.
If you plan on withdrawing cash from your business to pay yourself then you will need to enter that amount in this section. One way to determine how much you are going to withdraw from your business is to figure out your personal expenses for the year or you can find the average percentage for owners' compensation for your industry and multiply it by your projected sales.
You are also going to need to include income taxes that are going to be paid to both the federal and state tax authorities. The average amount that a business pays is around thirty to forty percent on their net income after depreciation, so plan accordingly.
After all is said and done you will have figured out the amount of cash you have at the end of the month, but remember this number needs to be positive in order for your business to work. If you do end up with a negative number you will need to go back and rethink some of the numbers. Some ideas would be to increase your loan amount, put in more equity yourself, delay unnecessary expenses, reduce your withdrawals, and a few other things.