Managing the finances of your startup is a constant balancing act. From the moment you begin trading, cash will constantly be moving in and out of your business account. It’s crucial to develop a robust cash flow forecast to help you stay on top of the numbers.
A cash flow forecast is a document that maps out your financial activity over a specific period of time in the future. You input the sums you think you’ll be spending as a business as well as those you expect to be receiving.
“The discipline of having a cash flow forecast is not only so you don’t run out of money or overspend,” he said. “Creating a decent forecast – be that on a spreadsheet or by using some form of software – is a real bedrock of growing a business.”
Indeed, a cash flow forecast isn’t only for making sure you’re able to pay your bills each month; it paints a detailed picture of your startup’s capacity for scaling.
A forecast helps you to be strategic with your cash and gives you an idea of when it might be possible to build up funds to reinvest in your business.
It’s also a useful way to plan for upcoming challenges, manage seasonal variations in trade and make important financial decisions – such as when to hire an employee.
What will investors want from your cash flow forecast?
Your cash flow forecast is a key document for potential investors and could be the difference between securing and missing out on funding.
Why? Because seasoned investors won’t make risky investments. They want to know that any business they hand over cash to will deliver it back – and then some.
So, they’ll want to see not only that you’re on top of your cash flow, but that your future income can reliably outstrip your outgoings. This will go a long way to convincing them of your viability and potential as a business.
It’s important to make your cash flow forecast as detailed as possible and, of course, make sure the numbers stack up. You’ll want to position your business as a tempting proposition for investors, but accuracy and transparency should come first.
The challenges of forecasting cash flow as a startup
Let’s address the obvious issue here: as a startup, you’ll have pretty limited financial data to base your forecast on.
More established businesses have years’ worth of financial records to look back on and inform their cash flow predictions. Startups are basically taking a stab in the dark, right?
This is why, if you’re still in the early stages, it’s best to start by forecasting your outgoings. These numbers will be much more reliable because you’ll be able to source solid figures or make accurate estimates when it comes to what you’ll be spending on things like stock or rent.
Once you have your outgoings listed, you’ll have an idea of how much money you’ll need to bring in to create a balanced flow of cash. You can then use this to inform things like the price points for your services or products, invoice terms and investment needed.
Creating your forecast
When it comes to preparing your forecast – putting figurative pen to paper – there are a few things you should consider.
Your cash flow cycles
This document isn’t just a general overview of your finances; it should really get into the nitty-gritty of your cash flow, ensuring there’s always a reliable cash reserve. So, although many of your outgoings might be monthly, it’s best to work in shorter cycles.
As Haines Watts’ Matt explained:
“It can depend on the industry, but most businesses will need to work on a weekly basis. You should be looking at cash flow forecasting week-by-week,” he said.
When it comes to how far you should be looking into the future, it can be a tough call. You need to plan to stay prepared, but the further out you go, the less reliable your estimates will be.
“I never see any point in going much beyond 12 months,” Matt added.
It’s likely that you already have an idea of the kinds of things your business will be spending money on over the next few months. Begin your cash flow forecast by recording all these costs.
It’s important you think of every foreseeable bill – from rent to loan repayments, wages to bank fees, invoices to marketing costs. Everything, however big or small, that you’ll need to fork out for should be included, along with the frequency of the payments.
Now you have your outgoings, you have an idea about how much cash your business should be aiming to take in.
List each individual revenue stream your business has. As well as sales, you might consider any recurring fees paid by long-term clients, funding you’ve secured and tax refunds you’re owed.
Now it’s time to estimate the numbers. Try basing your guesswork on any stats that you do have, like potential client databases and market rates.
Mapping out your cash flow
There are plenty of cash flow forecast templates and examples online to give you an idea of the different ways you can organise your financial information.
Try not to overcomplicate things: essentially, each column needs to represent a week while the rows are for listing the sources of your projected income and outgoings.
Opening and closing balances
Each week should have an opening balance, which is the sum that’s left over from the week before. And, at the end of each week, you’ll have a closing balance, which will see you through the start of the week after.
Remember, it’s about never letting that balance get too low – you want to maintain cash reserves to give you a buffer in case of unforeseen costs or dips in revenue.
Know your numbers
Finally, keep in mind that this document could be the difference between a potential investor coming on board or passing you up. Make sure the numbers stack up and that, where they’re estimated, you can explain how you arrived at that figure.
Get to know your cash flow forecast intimately – you might be expected to answer questions about it in minute detail when pitching to investors.