Cash flow projection for new business

A cash flow projection for a new business is a forecast of the company's expected inflows and outflows of cash over a specific period of time, typically monthly or quarterly. This financial tool helps entrepreneurs and small business owners manage their finances, make informed decisions, and avoid cash flow problems. Here's a step-by-step guide to creating a cash flow projection for a new business:

Step 1: Determine the time period

Choose a specific period for your cash flow projection, such as the first year of operation or the next 12 months.

Step 2: Identify the key components

A cash flow projection consists of three main components:

  1. Cash Inflows: Revenue from sales, services, or other sources.
  2. Cash Outflows: Expenses, such as salaries, rent, inventory, and equipment purchases.
  3. Net Change in Cash: The difference between cash inflows and outflows.

Step 3: Estimate cash inflows

  1. Revenue: Estimate your monthly or quarterly revenue based on your business plan, market research, and industry trends.
  2. Accounts Receivable: Estimate the amount of time it takes to collect payments from customers (e.g., 30, 60, or 90 days).
  3. Other Inflows: Consider any other sources of cash, such as loans, investments, or grants.

Step 4: Estimate cash outflows

  1. Fixed Expenses: Estimate your monthly or quarterly fixed expenses, such as:
    • Salaries and benefits
    • Rent or mortgage
    • Utilities
    • Insurance
    • Equipment and software costs
  2. Variable Expenses: Estimate your monthly or quarterly variable expenses, such as:
    • Inventory costs
    • Marketing and advertising expenses
    • Travel and entertainment expenses
  3. Other Outflows: Consider any other expenses, such as loan payments, taxes, or debt repayment.

Step 5: Calculate the net change in cash

Subtract your cash outflows from your cash inflows to determine the net change in cash for each period.

Step 6: Create a cash flow projection template

Use a spreadsheet or a cash flow projection template to organize your data. A typical template includes:

Period Cash Inflows Cash Outflows Net Change in Cash Ending Cash Balance
Month 1
Month 2
... ... ... ... ...
Month 12

Step 7: Review and revise

Review your cash flow projection regularly to ensure it accurately reflects your business's financial situation. Revise your projection as needed to reflect changes in your business or market conditions.

Example Cash Flow Projection for a New Business

Let's say you're starting a small online store selling handmade jewelry. Your cash flow projection for the first year might look like this:

Period Cash Inflows Cash Outflows Net Change in Cash Ending Cash Balance
Month 1 $5,000 (revenue) $2,000 (expenses) $3,000 $3,000
Month 2 $5,500 (revenue) $2,200 (expenses) $2,300 $5,300
... ... ... ... ...
Month 12 $60,000 (revenue) $30,000 (expenses) $30,000 $35,300

In this example, the business starts with an initial cash balance of $3,000 and generates a net change in cash of $3,000 in the first month. The cash balance grows to $35,300 by the end of the year.

Remember to regularly review and revise your cash flow projection to ensure your business stays on track financially.