Do I need a cashflow forecast for my startup?
If you are self-employed or an incorporated company it’s very important that you stay on top of your finances. Should be aware that if your finances are not organized your business will run out of cash and your business will fail no matter how great your business model is. To read our blog on why your business might have Securing business success
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A GENERAL BUSINESS RULE YOU SHOULD FOLLOW:
There is an important business rule and it is that the business money should stay in the business. To keep the business money separate you should have a separate business account which is maintained only for the business transactions. This way you will have a fair idea of how much you can invest in business or whether you have enough money to pay your suppliers and other liabilities such as taxes. Pay yourself salary at market rate or if borrowing money from business for personal loan make sure it is accounted in your business account as directors loan and treated accordingly.
WHY IS CASH FLOW FORECAST IMPORTANT FOR BUSINESS
With a good business model and an effective business strategy you should have a very efficient financial model. If you are not an accountant you might want to hire professional accountants to make your startup business a success.
Cash Flow forecasts will tell you your business’s financial position. You calculate the net cash flow which means you will estimate the cash coming in and subtract the cash that is expected to go out in the future to see how much cash you will be left in hand. This will help you predict how much money you are left with to reinvest in the business or It also helps to understand when you have to raise funds and how much you have to raise.
It is usually based on estimates and forecasts. If in the forecast you don’t see cash coming in your company will become insolvent.
If you are starting a business or have just started a business you should make a cashflow forecast. It’s going to take a little longer for the first time however it will take a few minutes next time. You can do cash flow forecasts regularly, some businesses do it weekly, some monthly and some do it quarterly. If you are a small business you will have to do it weekly. Startups should look at the weekly projections because they evolve so quickly.
WHAT SHOULD I INCLUDE IN THE CASHFLOW FORECAST
You should consider cash flowing in and out. The figures are estimates and therefore there is a chance of error, you should be well aware of the business and completely understand why you are making a cash flow forecast. For a startup this can be trickier since there are no historic figures and you might go wrong in predicting the income for the sales.
You might be dealing with different currencies for example you might be getting your supplies from a variety of countries, this might result in inaccuracies.
The cash coming in can be from the sales of your business product, any loans or from other sources. The costs that are incurred (cash outflows ) will vary from business to business. For example if you are selling items online your cash flow forecast will include the costs such as the following:
- Loan interest
- Advertising costs
- Insurance costs
- Legal costs
- Any subscription Costs
- Payments to made to the suppliers
The above list is only an example and it can include other costs as well such as depreciation costs.