A Beginner’s Guide to Cash Flow Forecasting – Part 2

Welcome back to the second part of our series, a beginner’s guide to cash flow forecasting! If you’ve not read the first part, you can catch up here. There, we talked about what cash flow and cash flow forecasts are, and why they’re so important for startups. Today, we’re going to get into the nitty gritty – how to start your cash flow forecast, step by step.

How Do I Start?

The good news is that, once you get your head around the basics, cash flow forecasting is fairly straightforward. All you need to get started is:

• Knowing how far into the future you’re planning (3 months? 6 months? 12 months?)
• Estimate your sales for that time (roughly)
• Estimate your costs for that time
• Plot of when money will be coming into your account, and when it will be going out

It’s important to remember that a good cash flow shouldn’t look too far into the future. 12 months is the furthest you can go without everything going a bit uncertain, and your predictions can go a bit wonky. Your planning will also be influenced by the type of business you are. For example, if you’re a software developer building apps on a 2-year development cycle, then you might need to forecast to cover that 2-year cycle But if you’re a retailer selling bespoke Christmas decorations, one year at a time is plenty.

Now, it’s time to create your sales forecast.

Create Your Sales Forecast

A sales forecast is essentially a list of everything you expect to come into your business over your chosen period, and when. It’s usually broken down by month, so that you can keep an eye on what’s going on and adjust your spending if sales aren’t going as well as predicted.

Now, you could just have the one line saying ‘money in’ and fill it in with the total each month. It’s basic, but it does the job. However, it won’t give you the best value in this process – to do that you need to break it down into line items. This is what helps you see what elements of your business are profitable, and which aren’t. For example, if you’re running a café, you might break your sales down into:

• Hot drinks
• Cold drinks
• Sandwiches and soups
• Cakes, muffins & sweet treats
• Catering events

Businesses who have been running for a while should find this easy, because you can just look back at your sales from the same period last year and use that as a base for your estimations. But if you’re just starting out, you might not have a clue how much you’ll sell and of what. Here, you can research what similar businesses sold in their first year, what other local businesses sell and how much you think you could sell. But be realistic! After all, this plan will likely influence how much you spend, so you don’t want to be over-optimistic, or you’ll end up spending more than you bring in. It should be based on what you think you can actually sell, not your sales targets, or what you’d like to sell.

A simple way to get started with estimating sales is to do the following:

• Calculate your potential reach per day/week/month
• Calculate the number who will view your products
• Calculate the number of viewers that will make a purchase
• Multiply this by an average purchase price

That sounds a little complicated, so let’s look at an example. Say you’re running a small shop in a shopping centre. Your estimate would look a bit like this:

• The shopping centre has a daily footfall of 2000 people (this is your reach)
• 5% of people enter the shop, leading to 100 viewers
• 20% of viewers will buy a product at an average of £80
• This means your quarterly income will be £1600, with a monthly revenue of £48,000

Don’t Forget to Factor in The Extras

Once you have some basic figures from this exercise, you can start factoring in anything that might affect your sales, both positively and negatively. This is where you include things like seasonal spikes and dips, which will vary depending on the type of business you run. This can be unpredictable, but it impacts your cashflow, so you need to factor it in.

If you’re building this sales forecast as a new startup there’s one more thing you need to factor in. There will be a period of time at the beginning where nothing much happens. This is while you’re out networking, marketing and promoting yourself, letting the world know you exist. This is called your ‘sales ramp up period’, and cover the time it will take you to go from 0 to fully operational business. How long this is depends on where you are, and the type of business you run. For example, a new high-street shop will likely have a fairly short ramp up period, whereas a new accountancy firm might have a longer one. Once you have broken down all sources of income into your business during that period in this way, it’s time to look at the other side of the coin – your costs.

That’s all we have time for today. Join us in part 3 to learn about forecasting your costs, seasonal considerations, and then pulling it all together into a cashflow forecast for your business. In the meantime, if you need any advice or support in getting your processes set up, or claiming unpaid invoices, just get in touch with the team get in touch with the Debtcol team today.