August 2007 (NCGE)
The preparation of cash-flow projections are best done on a spreadsheet such as Excel. A partly-prepared template can be used, or you may be able to use the displayed formulae from an existing cash-flow spreadsheet. The figures can be built up in easy stages:
Stage 1Estimate the minimum basic resources needed to start the business
Research the costs of these
Estimate how & when payment will be made on a month by month basis for one year.
Enter the data on the spreadsheet or template.
Stage 2Prepare your sales forecasts. If you plan to have several product lines, it may be best to estimate the sales of each product line separately. Sales should be forecast on the basis of units sold. For example, if you expect to sell 5 medical diagnostics kits per week priced at £50 each in month 1, 8 per week in month 2, and 10 per week in month 3, than your anticipated sales will be (£250 x 4) = £1,000 in month 1, (£400 x 4) = £1,600 in month 2 and (£500 x 4) = £2,000 in month 3, total quarterly sales of £4,600.
Research the characteristics of your target market that will affect sales. The obvious examples are seasonal factors: ice cream, soft drinks and gardening products sell well in summer but not in winter, and are adversely affected by poor weather, jewellery sells well in the run-up to Christmas, beer sales are related to holiday periods and football championships such as the World Cup.
If you are selling Business to Business, remember that you will be giving customers trade credit and payments will be lagged by at least one month from the date of your invoice.
Stage 3Add in (using formulae wherever possible) all of the costs & expenses which will be required in order to generate sales at the level you anticipate. If you are planning to start a retailing business you need to know the mark-up on your products, and to allow for this in your formulae in the 'Purchases' row on the spreadsheet.
From the figures you have so far, estimate your capital requirements, and the sources you plan to use for your capital, and add to the spreadsheet. Remember to add a monthly 'Repayments' figure for any bank loan or overdraft.
Use formulae to total rows and columns, and to show the opening & closing bank balance each month (see the example provided for Maudslay Consultancy Services).
HintsBanks & investors always look very carefully at cash-flow projections - apart from the Executive summary, they are the most important pages in the business plan. Banks make certain that you have shown that their money will be repaid regularly.
Common mistakesDO make sure that your cash-flow projections show that EVENTUALLY the business will make money. DO make provision for VAT and National Insurance payments (the VAT threshold is currently £58,000 in the UK). Small firms are now able to choose a flat-rate payment DO NOT include depreciation in a cash-flow projection.
Click here for an example of a cash-flow projection for a small firm.