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Waghorn Builders in Kaiapoi

The Bottom Line

Without money flowing through your business, you cannot grow, you cannot change and you cannot achieve your goals. While the primary purpose of the business may be around lifestyle, or community good, or any other number of worthy outcomes, you need to keep a good eye on the financials and understand them.

In the planning phases, it is wise (and often essential) to put together a cashflow forecast. This allows you to estimate the income and outgoings of the business, to know when the business is making money and know when the business is losing money. Most businesses do not start seeing a profit until 2-3 years down the track, so you need to work out realistically what you need to get the business going and how much money you need to survive while you work on it.

Putting a cashflow forecast together also helps you plan for seasonal variations in income and to understand when you are able to purchase items.

When putting together this document, take a middle-of-the-road or slightly conservative view - don't inflate expected income or underestimate costs. Your cashflow forecast should try as much as possible to be realistic.

We recommend filling in a cashflow forecast on an electronic template (like the links below), as you will want to adjust it as you go. Writing a cashflow forecast will show you where the gaps are, which will mean you make changes in your plan, which will change the numbers in your cashflow forecast. Writing a cashflow forecast really shows where the gaps are, and are the most important part of any business plan for knowing if your idea is viable.

Cashflow forecasting is the part of the business plan where you test your assumptions and calculate how viable your business is. A cashflow forecast will show how much money you need up front to start your business, how much money you might need to borrow to survive while the business grows, what your costs and income will be, and where any stress points might be.

In business, cash is king. Many businesses fail despite being busy, simply because they do not have the money in the bank to pay the bills when it is needed.

The secret of a cashflow forecast is…. it is all guesswork. However, you should try and make sure that your guesses are educated ones so that you are as close as you can be to what the reality is likely to be.

You are better to err on the side of caution. If you slightly underestimate your income and slightly overestimate your costs and the numbers still stack up, then that means that you should be able to survive the unexpected. If you overestimate your income or underestimate your costs, then that could mean your business fails.

We suggest writing a cashflow forecast for more than one year, as it can be several years before a business starts making a profit. You may be looking at investing more than you think in the first couple of years and you need to have a realistic idea of how much money you will require.

A basic cashflow forecast is not a great tool for calculating tax liability, but it can be used to help you work out whether your business is viable and will identify pressure points and opportunities throughout the year. Doing a cashflow forecast helps you to identify and mitigate problems well in advance of when they might arrive.

A Guide to The Cashflow Forecast

Start by making an estimate of how much money you will make every month from the month you begin trading. This should include all sources of income, including loans you might receive or your own capital you use to start the business. If you are applying for business grants such as the business startup grant from MSD you should include the estimated amounts here as well.

If you are registered for GST then make sure GST is included in your calculations. You will not be able to work out how much you can claim on GST until you have completed the Cash Out section

Remember that you are unlikely to be at full capacity to begin with and it may take months or years before you get there. It might be that you generate little or no income in the first few months.

Many businesses experience a good level of sales in the first month, followed by a slump and then a slow growth as you build up a solid customer base.

Other events that may affect the income you generate are:

• The seasons – will certain seasons affect your income generation, or should you reduce (or increase) your predictions based on the time of year?

• Holidays – How will Easter, Christmas, School Holidays affect your ability to earn?

• Short months – How many days will you be trading each month? Will this affect your income?

• Sporadic Sales – It may be that you do not have a constant income. Put the predicted income in the month where you think it will occur.

If you are writing a business plan as part of an application for a bank loan or for any other formal purpose, then it is very useful to write an explanation of your assumptions. It should be clear why you think you will make x dollars in any month for any item.


Go back to your pricing and costing. Some of your costs will be fixed and some will be variable. The fixed ones are easy to calculate and should be the same each month. The variable ones will change depending on how much activity you are undertaking or on outside factors (such as more power costs in the winter).

In some cases, there will be a lag where you need to pay for materials or services well before you are able to generate an income from the product you create. Be realistic in your timing.


A common error in a cashflow forecast is forgetting to put money aside for yourself. This is generally drawings (if you are a sole trader), or it can be salary and/or drawings (if you are establishing a company). The important thing is to try and pay yourself a regular and survivable income while you are setting up. Some of your costs may be less than you think (such as if you have taken a portion of your weekly rent or mortgage as a business cost)

It is worth writing up a personal budget showing how much you need to survive. This should be the minimum you pay yourself, with the hope of increasing this amount as the business progresses.

You should now be able to subtract your costs from your income for each month to calculate your surplus (if you have made money) or your deficit (if you have lost money). The opening balance for your first month will be $0. Do not panic if you are running a deficit on any given month, what is important is that your closing balance stays well above zero. This indicates that you will have enough money on hand to pay bills as they arrive.

If you are not making enough money to pay your bills, then there are a number of aspects of your business you can re-look at:

  • Lower the amount you draw from the business
  • Re-look at your pricing and costing
  • Take a larger loan to cover costs
  • Invest more capital from your savings (if you have savings)
  • Bring in investors (see module 6)
  • Work out how to attract more customers

If you find you have a very tidy balance at the end of the year, then that gives you options to improve the business or to draw more income from it for you.

In your cashflow forecast you will be making assumptions and intelligent guesses. That’s fine, but if you are presenting your cashflow forecast to someone else (such as a potential investor, a business startup fund or a bank) then they will want to know the basis of your assumptions.

Most of your assumptions will be in the ‘cash in’ section. The ‘cash out’ takes a lot less guesswork.

For example:

  • Why do you think that your business will grow at the rate you have assumed?
  • Why has your income dropped in certain months?

Write down any assumptions you make, or any items that are not self-explanatory. This will help readers to understand the basis of your cashflow forecast.

Get alongside a good business manager at your bank. It has to be someone you feel comfortable with and who you feel you can have an ongoing professional relationship with. Make sure that the bank aligns with your business goals. Be willing to change banks if you do not feel that they are the right fit for your business. You are setting up a long-term relationship here and you want to know that they understand you.


Every business survives on its cashflow. You need to have money on hand to pay bills when they arrive. Many excellent businesses go broke simply because they did not have the money they needed when they needed it. This can be a timing issue, you may be pricing your product or service too cheaply, or you purchased items for the business at the wrong time.

Looking at your cashflow may show you that you need to get an overdraft facility, or to have a cash buffer to manage the slow periods.

Many businesses fail even when they are bringing in a large amount of work – this is because they have not planned out their cashflow

When you are trying to bring in investors or get a loan, any potential source of funds will look very carefully at your cashflow forecast. This is the part of your business plan that really shows whether your business is likely to succeed and it is also the part that demonstrates how realistic you are in your assumptions.

There are a list of options and suggestions for raising finance in the ‘Funding and Investment’ training module later in this course.

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