Published on September 22, 2024
In the first few years, new businesses across various industries often struggle with sales not covering operational expenses or startup costs. As a result, many experience cash shortages and, unfortunately, may have to close their doors. As discussed in our previous blog, cash flow forecasting is one critical component of financial planning that business owners must get right from the start. This blog will guide you through key principles of cash flow management, offering practical tips to help your new business thrive with the assistance of a CPA Accountant in Burnaby.
What Is a Cash Flow Forecast?
A cash flow forecast is a financial tool that estimates the amount of money your business expects to flow in and out over a specific period—typically monthly, quarterly, or annually. Unlike a budget, which focuses on income and expenses, a cash flow forecast zeroes in on when cash will be available to meet obligations. This distinction is crucial for new businesses where cash flow might be erratic and unpredictable.
Why Is a Cash Flow Planning is Important for new business?
1. Predicting Financial Health:
A cash flow forecast provides a clear picture of your business’s financial health. It allows you to anticipate when you might face a cash crunch and need additional funding or when you’ll have surplus cash to invest in growth opportunities.
2. Decision-Making Tool:
With a cash flow projection, you can make informed financial decisions. Whether it’s the right time to hire staff, invest in marketing, or purchase equipment, your forecast provides the data for strategic moves with confidence.
3. Avoiding Surprises:
A cash flow forecast helps you avoid running out of cash—a common reason for business failure—by alerting you to potential shortfalls so you can take corrective action.
4. Building Investor Confidence:
For business owners seeking funding from potential investors or lenders, a detailed cash flow projection can instill confidence. It shows that you’ve considered your financial goals and have a solid plan to manage cash flow effectively.
Steps to create a cash flow forecast
1. Estimate Startup Costs:
Startup costs can vary significantly depending on the industry and scale. Common expenses include legal fees, equipment, location, inventory, marketing, and insurance.
2. Estimate Your Sales:
Estimate your sales for each period based on market research and industry trends. Be realistic, as overestimating sales is a common pitfall for new businesses.
3. Calculate Cash Inflows:
Beyond sales, consider other sources of cash such as loans, investments, or grants. Include the expected timing of these inflows to ensure accuracy.
4. List Your Expenses:
Break down all expenses, including fixed costs like rent and variable costs like raw materials. Include taxes, loan repayments, and any accounting fees.
5. Calculate Net Cash Flow:
Subtract your total outflows from inflows to calculate your net cash flow. If negative, you may need to adjust your cash flow management strategies or seek additional funding.
6. Monitor and Adjust:
Your cash flow forecast should be a living document. Regularly compare your forecasted cash flow to actual results and adjust as necessary. This will help you refine your predictions and make more accurate forecasts in the future.
Suggested Tips for Effective Cash Flow Forecasting
1. Be Conservative:
Underestimate inflows and overestimate outflows to prepare for worst-case scenarios.
2. Consider Seasonal Variations:
Account for fluctuations in sales and expenses, particularly for businesses that experience seasonality
3. Plan for Contingencies:
Set aside a portion of your cash as a contingency fund for unexpected expenses. This cash reserve ensures you’re prepared for any financial surprises.
4. Regular Reviews:
Review your cash flow projections monthly to stay on top of your business’s financial situation. Consider engaging an accounting firm for ongoing financial management services and professional advice.
Cash Flow Planning with Accountant in Burnaby
Starting a new business is a bold step, but with diligent cash flow planning, you can increase your chances of long-term success. Whether it’s preparing financial statements, managing corporate tax returns, or helping you navigate cash flow budgeting, a CPA firm will be an essential partner in your entrepreneurial journey. Take the time to craft a detailed cash flow forecast with an experienced CPA like us —it’s an investment in your business’s future.
