How to Tell if Your Cashflow Supports Your 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. But 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 main 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 main 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

certain 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. This is also an important 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.

This may include vehicles, plant and equipment or intangibles such as trademarks. These are

the large, 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 that cash flow is all about timing and the flow of cash, so when preparing your cash

flow forecast, make sure you are as accurate as possible on the timing of the cash flows.