Cashflow Forecasts for start ups is a crucial document. Creating a forecast that is realistic will not only provide you with a deeper understanding of your business’s financial health, but it could also help you predict its future.
Furthermore, your Cashflow Forecast and Sales Assumptions form a critical part of the Start Up Loan application process. Here, SWIG’s Start Up Loans Officer, Jo MacEachen, explores what these documents are, what they will help you to achieve, and more importantly, her top tips for getting them right.
What are Cashflow Forecasts for Start Ups?
Essentially, a Cashflow Forecast predicts how much money will come into the business, and how much money will go out.
Understanding your business cashflow is just as important as having a quality product or service.
Your Cashflow Forecast allows you to understand how much money you will need to earn each month to keep your business afloat. If you generate monthly sales of £4k but your rent, rates, utilities, and wages bill come to £5k each month, your business will soon begin to struggle, and you’ll be operating at a loss.
It doesn’t matter if you have an all-singing and dancing product; if you can’t pay your bills your business will not survive its challenging first year and beyond.
Creating a realistic Cashflow Forecast for your start up will provide you with a deep insight into how income will be generated, and the level of outgoings your business will have.
What is included in Cashflow Forecasts for Start Ups?
Sit down and logically think about your monthly business expenditure. Rent, rates, phone line, utilities, web fees, card fees, staff, accountancy software, and any other regular expenses applicable to your business.
This will begin to build the picture of what your business reality will be.
Think about how cash will travel through your business. Do you need to purchase stock in one large order which will last you for 6 months? If you invoice your customers, how long will it be before payment reached your account? If you are VAT registered, will you pay monthly or quarterly?
All these types of questions help you forecast your business’s cashflow, empowering you to be ahead of the game and building resilience in your business.
My advice is to become friends with this document and make it work for you.
How do Sales Assumptions feed into the Cashflow Forecast?
Sales assumptions are another key piece of information that informs your Cashflow Forecast, as this is the money coming in.
Obviously, for those businesses who have not yet started trading, your sales assumptions will be ‘best guess’. For those businesses that are already trading, you will have some data to help you here, but this will still be an estimation.
How many items are you going to sell per month? Be as realistic as possible. For example, is it realistic that you will be selling 40 hour-long beauty treatments per week if your business is only open for 30 hours a week?
Is your business seasonal? Reflect this is the sales assumption, it’s unlikely that you will be selling many Christmas decorations in February.
Do you sell so many items that you can’t list them all? Well think about an average customer spend, whether that’s a basket full of items in a shop or the external painting of a standard 3-bed semi.
Please be realistic when making your sales assumptions, make them achievable – there is certainly a feel-good factor in achieving your milestones. If you set your expectations too high, you might find yourself disappointed with your results.
Remember, building a business reputation takes time. Recognise that the initial starting period will be challenging, and it will take time to build a client base.
How to complete the Cashflow Forecast and Sales Assumption templates
If you’re looking to apply for a Start Up Loan, you’ll be pleased to hear that the Start Up Loans Company has templates to help you get started.
It’s worth pointing out at this stage that data entered into the Sales Assumption template carries across to the Cashflow Forecast.
Let’s take a look at the Cashflow Forecast for Start Ups template.
Initial one-off spending goes in starting point column, monthly business expenditure goes in each corresponding month on the Cashflow Forecast. It’s important that you list all your business outgoings here. Even if the cost is low, these soon add up.
Over to the Sales Assumptions. The first section will help with understanding your Gross Profit (GP) which is “technically” the same principle as your overall GP when you do your books at the end of the year.
To break it down;
You sell a product or service for £20.00
But it costs you £5 to buy it (costs of goods and services (CoGS))
So, your gross profit is £15 on each item you sell.
Making your gross profit margin 75%
A gross profit of 75% sounds fantastic but remember, this is before deducting the business overheads (which will give you Net Profit).
But if you only sell 100 items, your gross profit would be £1,500 but your monthly business overheads are £2,000. You will be making a £500 loss each month.
This is why it is instrumental to get to grips with these documents so you can truly understand your sales targets and so much more.
Your Cashflow Forecast is a Live Document
Now that you have your Cashflow Forecast and Sales Assumptions, remember that you will need to keep a record of your expenses and record a balance sheet.
As time goes on, you’ll be able to compare your balance sheet against your Cashflow Forecast predictions.
From here it is worth reviewing your expenses. You might find some expenses worked out more costly than predicted, whereas other costs may be cheaper than estimated. Keeping tabs on your expenses will help you identify whether there is scope for you to reduce any of your costs going forwards.
Remember that your predictions are only as good as your data, so it is important that you keep track of your incoming and outgoing monies to make your future forecasts more accurate.
Cashflow Forecasts for Start Ups: Final Words
SWIG Finance is the South West’s Business Support Partner for the Start Up Loans Scheme, and we are here to help and support you.
If you get stuck, don’t get yourself in a fluster about it. Highlight the cell in a stand-out colour and move on to the next row that you can complete. In the meantime, request a call from your Start Up Loans advisor to go through the highlighted cells with you and find the answers.
Being as prepared as you can will set you off on strong foundations when building your empire. Getting your head around this element of your business as you begin, will save you time and stress in the future.
The bottom line is that this is your business and the sooner you become friends with your Cashflow the more time you will have to spend on building your customer base.
About SWIG Finance
SWIG Finance is a non-profit company that supports viable South West businesses that can’t secure sufficient funding from their bank. By empowering underserved small businesses to overcome their financial barriers, we are working to create a more balanced financial ecosystem.
We’re growing every year. In 2022/23, we lent £14m to 478 businesses, helping to create and secure over 1,000 jobs and generate £44.6m in social impact. Download the report here.
If you’d like an informal chat about your funding requirements, get in touch with our friendly and professional team to see how we can help: info@swigfinance.co.uk / 01872 227 930.