Determine the flow of cash into and out of your business. This is the lifeline of your business. It will enable you to clarify how much money you need to operate each month.
The secret to completing a meaningful cash flow is research. The cash flow is an opportunity to build tremendous confidence in your business. That confidence arises from knowing your business and basing your estimates on well-researched assumptions and facts. If you have done your homework, your cash flow will be easy to project.
A solid Cash Flow Forecast will include detailed inflow and outflow of monies from your business for Year One. Year One is typically forecasted in detail, month by month. Years Two and Three are usually projected as a percentage increase over Year One. For example, my business plan projects a 20% increase in sales for the second year and a 30% increase in sales for the third year.
Key points to remember about completing your cash flow:
- Project your sales conservatively.
- Allow more than you think you will need for expenses.
- Cash-in items are entered into a cash flow during the month they enter your bank account, and cash-out items are entered during the month they exit your bank account.
- Your cash flow is the snapshot you and your banker need in order to determine how much you need for an operating loan.
- Business analysts and bankers will use your cash flow as a measure of whether you know your business.
View the Example: Cash Flow Forecast
Action
There are at least a couple of approaches to completing your Cash Flow. One is to do one month or column at a time, from top to bottom. The other is to complete each line item or row from left to right. Use the method that works best for you.
- At the top of your Cash Flow Worksheet, enter the names of your first 12 months of operation. If you are using the Biz4Caster™, this will already be done for you.
- From your Sales Forecast, enter all sales in the months during which the cash actually enters your bank account.
- Enter all other sources of cash entering your bank account during the month they enter your bank account. Include sources of cash other than sales, such as loans or grants.
- Calculate the Total Cash In amounts for each month and enter the totals into the Total Cash In row.
- In the Cash Disbursements (Cash Out) section, calculate and enter your total Cost of Goods Sold into each month in the Purchases (Cost of Goods Sold) row.
- In the Cash Disbursements (Cash Out) section, project your expenses for each of the first 12 months and enter them into the month during which the expense will be paid.
- Enter your Management Salaries and Wages for each of the first 12 months.
- Calculate and enter the Employer Wage Burden and Workers’ Compensation amounts.
- Enter any loan payments, usually separating the interest from the principal. This is because the interest is an expense to your business while the principal is not.
- Calculate the Total Cash Out amounts for each month and enter the totals into the Total Cash Out row.
- In the Cash Flow Summary, enter zero as your opening balance for the first month.
- For the first month of operation, enter the Total Cash In and the Total Cash Out.
- Beginning with the opening balance, add the Total Cash In and then subtract the Total Cash Out. The result is your Closing Cash Balance.
- Carry the Closing Cash Balance for the first month to become the Opening Balance for the second month.
- Repeat this process until you have completed all the first 12 months of operation.
- Calculate the first year’s totals for all cash-in and cash-out line items.
- For Years Two and Three, estimate total amounts for all cash-in and cash-out line items. Most businesses will project a modest increase in sales for Year Two and Year Three, which might necessitate increases for some, but not all expenses.