Before starting, every new business should prepare a cash flow projection. However superficial this may sound at least this will provide you with a visual representation of what is to come. One thing to note, please do tone down on your revenue expectations. It is usually the case that you over estimate your revenue resulting in insufficient funds to cover all your expenses.
What is a cash flow projection (CFP)?
An estimate of your income and expenditure over a 12-month period – set out in such a way that you can calculate your projected bank balance at the end of each month. In other words, will I make money, will I be able to pay all my costs and earn a salary?
What are the advantages of having a CFP?
- It can tell you what your breakeven point is likely to be – for example how much money you need to cover the overheads.
- These projections can enable you to compare actual monthly income and expenditure. You will, for example, be able to see if you are meeting your sales targets each month.
- If you are not meeting targets, you need ask yourself why not and what you can do about it. Comparison of actual and projected income is an important aspect of a CFP which needs to be done on a monthly basis.
- It can let you see when you have bank overdraft. Should it be the case, you must speak to your bank manager and arrange an overdraft facility.
- The CFP is a vital part of any business plan because it is an important aspect for any bank, credit union or lending body – they always focus on the CFP.
Click HERE for an MS Excel working document for cash flow forecasts, amortization schedules as well as Net present value calculations. Make sure you use these as they will positively impact your chances of success.
