Will your cashflow support your new business idea?

According to Census data in the USA, more than 40 percent of all small businesses started up for under $5,000. Sixty-four percent of entrepreneurs in a recent Intuit survey started with less than $10,000. However, whether you are starting with a little or a lot of cash, forecasting is essential for any business to survive.

All businesses must deal with uncontrollable variables, but a forecast will prepare you for the future as much as possible. The primary purpose of a forecast when starting a business or considering a new business idea is feasibility. ‘Will this make money?’ ‘How long before we can turn a profit?’ ‘Will I be able to pay myself a wage or afford to hire staff?’

These are questions a well thought out forecast can answer.

In particular, a cash flow forecast will help you see the timing and amount of when inflows and outflows are likely to occur. This can mean you may choose to delay a supplier order, hold off on buying new equipment, or organise a credit facility until the business is profitable. This information will allow you to make better-informed business decisions.

Remember, a forecast needs to be accurate and take account of as many variables as possible. It should also focus on your primary business drivers to determine levels of income and expenses. Drivers are the levers, that when pulled, can influence the direction of your business. Questions to consider include: What are the main ways to intend to recruit new customers? How much does it cost to drum up new business? How long will it likely take to convert a lead to a paying client?

The easiest way to prepare a cash flow forecast is to break the task into several steps. Firstly, start with sales. Your sales numbers will depend on various factors, such as the types of customers you sell to, how quickly they pay you and other market influences such as interest rate increases or what your competitors are doing. Sources of cash vary from business to business. For product sales, this may depend on the number of products sold, the launch of a new line or specific events that will increase or decrease sales. For service-based businesses sales can be calculated per customer, number of customers, total revenue with current and expected customers. It is also a critical time to decide on a pricing strategy and whether you need to factor in discounts.

Next, you will need to look at direct costs and overheads. Start by estimating all the cash outflows you can. If you do this, you’ll get an idea of how much cash needs to come in to cover the cash going out. You will need to work out what it costs to make goods available or the cost to produce your services. Again, expenses depend on the type of business you are starting or already run. Other costs to consider include labour and wages, other staff costs such as Workcover and leave entitlements, rent, utilities, insurance, royalties, franchise fees, licence fees and subscriptions. Income tax and GST are also important considerations.
Apart from running costs, you will need to consider the cost of purchasing assets and equipment. It may include vehicles, plant and equipment or intangibles such as trademarks. These are the significant, one-off investments that usually require the most upfront capital when starting a business.

After looking at assets, the repayment of liabilities is the next step. This includes the amount and timing of loan repayments (principal and interest). It is also important to consider any bank fees such as loan establishment fees, government fees and stamp duty.

The final, and perhaps most important step of all, is to go back and ‘sense check’ your numbers. Remember cashflow is all about timing and the flow of cash, so when preparing your cashflow forecast, make sure you are as accurate as possible on the timing of the cashflows.

Stephanie Mellick
Stephanie Mellick
stephaniem@castawayforecasting.com