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:
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.
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.