Cash flow is another important financial metric that founders should understand when determining how much money their startup needs. It refers to the amount of cash that flows in and out of your business during a specific period, usually a month. Positive cash flow is how businesses pay their bills, so predicting your cash flow is crucial to ensuring that your business will be viable.
Cash flows are normally presented on a cash flow statement, and a good financial projections template will have one that automatically fills in for you from your projections of revenues and expenses.
To calculate your cash flow, you need to know the inflows and outflows of cash for a given period. Inflows of cash can include sales revenue, loans, or investments, while outflows of cash can include expenses like salaries, rent, and utilities.
You can calculate your cash flow for each planning period (typically a month, a quarter, or a year) using the following formula:
Net cash flow = sum of inflows of cash - sum of outflows of cash
For example, let's say that your startup received $50,000 in sales revenue and $20,000 in loans during the month, and your expenses, including salaries, rent, and utilities, totaled $60,000. Your cash flow for the month would be:
Cash flow = ($50,000 + $20,000) - $60,000 = $10,000
A positive cash flow means that you have more cash coming in than going out during the period. This is what you want; it makes it possible for you to pay the bills. On the other hand, a negative cash flow means that you have more cash going out than coming in, which will lead to using debt (e.g. credit cards) to pay bills and might ultimately have to file for chapter 11 bankruptcy in the business. When your cash flow prediction is negative, you should go back to your assumptions about pricing and what is needed to achieve desired sales. You'll need to find ways to either increase revenue or decrease costs.
Trovata offers a lot more detail on how to predict cash flow before starting your business, and why it's important.
Posted by Thomas Hopper on Permanent link for Planning for Cash Flow on June 2, 2023.