How to get started on your cash flow projections

Definition:   The difference between the available cash at the beginning of an accounting period and that at the end of the period. Cash comes in from sales, loan proceeds, investments and the sale of assets and goes out to pay for operating and direct expenses, principal debt service, and the purchase of asset.

To test the feasibility of a new venture and to set goals, entrepreneurs need to plan for cash flow.    Especially for a start-up, the question is how to estimate sales when there is not historical data.   Projections are much like putting together a puzzle with the cash flow template providing the outline of information that needs to be researched.    The template also provides an area for recording the assumption you have made in determining your numbers.

Planning for a new business, the entrepreneur begins by gathering information focused on start-up costs to open their business.   Using a start-up cost worksheet ensures that all  costs are planned for and none are overlooked.   Those start-up costs include any income requirements for the entrepreneur through the start-up process.

Another area to investigate are monthly expenses.   Some of these are fixed which mean they don’t vary with the sales numbers.    And example of a fixed cost is rent.   Variable expenses do change depending on sales and can be calculated as a percentage of sales.   Example of a variable cost are direct labor or materials costs that go into production of a product.

Sales projections and concern for accuracy often are a concern to the new entrepreneur.   Think about sales in terms of “what if” situations.   One way to estimate sales is done by estimating the number of customers, their average sales amount, and calculating the weekly or monthly sales.    Another way to project sales is based on covering expenses, calculating the break-even point, which provides the sales number  needed to cover all expenses.    Then a reality check.   Does it seem possible that the business can generate the sales needed to be profitable.    And don’t forget again owner’s withdrawal.    What are your income goals?    A profitable business is profitable to the owner.

Clients of the MI-SBTDC can request information from sources such as Fintel Industry Metrics Reports.   These reports provide financial reports and performance of privately held businesses.     Research for Fintel and other sources is based on NAICS (North American Industry Classification System) codes from the U.S. Census Bureau for collecting, analyzing, and publishing statistical data related to the U.S. business economy.    Researching your industry through the use of NAICS Codes provides information that covers all elements of business.

Building cash flow projections are made easier by walking through the process aware of resources and methods available to gather this information.   Understanding how the cash flows through a business and providing for shortfalls ahead of time is critical to the success of a small business.    An important service of the MI-SBTDC is to look at the “what ifs” in the future of a small business.

The MI-SBTDC works statewide to provide business counseling for smarter, stronger businesses.   For more information about the statewide MI-SBTDC, click here.   For MI-SBTDC small business planning tools, click here.

In Livingston County, contact Nancy Johnson at 810.227.5086 or  email nancyj@livingstonsbtdc.org.    To like the Livingston SBTDC Facebook Page, click here.

Written by Nancy Johnson, Satellite Director of Livingston SBTDC.   To visit the Livingston SBTDC homepage, click here.