In his second of three posts looking at some of the things you need to do to get your new business financed, our Chief Financial Officer Greg Taylor looks at the importance of a cash flow forecast.
Last week we started to look at financing the start-up of a business, focusing on business structure. This week, let’s look one of the other two things my Head of Business Banking says are essential to starting a business - preparing a cash flow forecast.
A cash flow forecast will help you work out how you will finance your business for the first year or two of operations using your own money and perhaps some borrowed money. To create it you need to estimate how much money you need to set up the business and then how much you need to run the business once it is set up.
Even a profitable business can need finance to keep running. Especially when you are starting up, there can be a difference in timing of when you have to pay expenses and when you collect income.
Work out how much cash you will be contributing so you then know how much debt you will need. Your core debt can be financed by a loan or by leases or hire purchase for equipment and vehicles. The non-core debt fluctuates from time to time. It is usually financed by an overdraft or line of credit. This finance is usually more expensive than a loan, but more flexible.
Make sure you allow for your living expenses and things such as fees, insurance and tax bills. It may be some time before you can afford to pay yourself. It is usually much longer than you first think so double your original estimate. One of the major reasons people are forced to quit their business is because they run out of money before the business has had a chance to establish itself. There is nothing wrong with the business; the owners just can’t hang in there long enough for it to build up.
You can get help online and from your accountant to set up a cash flow forecast.
The Greater's Business Banking team can help you with more information about financing a new business.
This blog is adapted from Greg’s weekly column in the Newcastle Post newspaper.
Next week: Your Business Plan.
Please share your tips for starting out in business below.