Trying to predict cash flow can be tricky when you’re starting out. Our guide can help you forecast ahead with more confidence.
A cash flow forecast can help you work out your business’s potential to make a profit and identify when cash may be short. It’s an estimate of incoming cash and outgoing expenses, for a given period (e.g. week, month, year) in the future. It’s important to forecast this as it can help you anticipate and prepare for costs such as your tax obligations, plan purchases, and estimate your working capital needs.
If you’re new to business, you might not have existing cash flow data to work with – but you can still make informed estimates using industry averages and expert advice.
Income can come from many sources, such as sales, bank loans, and interest on savings. To predict income, you can:
- add up advanced sales, pre-orders, or contracts.
- use industry benchmark figures.
- ask potential customers how much they’d buy.
- assess current market conditions and trends.
- use Stats New Zealand’s Industry Profile tools to estimate market size.
- It’s also important to consider things that could impact your income, like seasonal changes in demand, economic conditions, or payment delays from customers. This will help you forecast more accurately.
If you’re still stuck, then another way to approach this is to work out what you must sell. Complete a break-even for your business (use our break-even calculator) to see what you absolutely have to sell to cover costs. This can be the starting point of your cash flow forecast.
Outgoings are made up of fixed costs you have to pay (e.g. rent, salaries, power, internet) and variable costs, which go up and down depending on how busy you are (e.g. raw materials, consumables, inventory).
As a new start-up, you may also need to consider one-off costs like opening inventory, equipment, vehicles, and any marketing launch expenses. To predict outgoings, you can:
- search online for prices to get a ballpark idea
- research actual costs by contacting suppliers
- include an amount for unexpected costs (contingency) include a realistic salary for your own efforts
- know when tax payments (GST, provisional, terminal) are due.
Using your forecast
Once you’ve completed your cash flow forecast, check to see if there’s a negative balance during any period. This is when you may need to add a cash injection from your savings, overdraft, extra loans or another source to help prevent you from running out of cash.
Update your cash flow forecast each month by adding in actual sales and expenses next to your estimates. The comparison can help you:
- predict future seasonality fluctuations
- identify when you need extra funds or an overdraft cover
- assess the impact on profit if you want to add extra capacity
- see when you can afford new assets
- calculate the timing of loan repayments
- determine when you may run out of money or have excess cash to save.
When creating your forecast it’s good practice to create multiple variations so you can see what impact different scenarios could have. Include best, worst, and most-likely case scenarios. You’ll then be better prepared if you suddenly hit tough times or have better than expected trading conditions.
Regardless of where you are at in the journey of setting up your own business, forecasting your cashflow is one of the most important things to do, and is something you should revisit often. Don’t forget the golden rule in business: always have more money coming in than going out.