Managing and Forecasting Cash

No matter if you are a new business or an established one, when you run out of cash, your business is over. You need to know how long your cash can last and how much you need to stay afloat, and the best way to do this is with a cash forecast. This forecast will give you a better understanding of your cash position and help you optimize your access to capital.

Step 1: Personal Wealth Statement

The Personal Wealth Statement is how much cash you have personally to contribute to the business. This document is something you will likely need to show a banker to get approved for funding. It describes your assets and their liquidity, your liabilities, and your payments. This will show a banker your equity.

Step 2: Item Costing

Item Costing is essentially how much your product or service costs to produce. Calculating this excludes your overhead (rent, utilities, insurance, etc.) but includes your labor costs. You can do this for basically any product or service, including for batches.

Step 3: Customer Acquisition Costs

An often-overlooked aspect of your finances is how much it costs to get a customer. Your marketing budget/spend is going to be the single greatest line item that slows your business growth. You can use your advertising costs and standard industry conversion rates to get a rough idea for this. Eventually, with experience, historical data, and refinement of the Growth Track you can lower the cost to acquire a customer.

Step 4: Use and Source of Funds

When outlining your Use and Source of Funds, it is helpful to remember that the use of funds will determine their source. Essentially, lenders specialize in different types of loans, so where you borrow from is determined by what you are borrowing for. Your Use and Source of Funds will be modified after you have a forecast that helps you project how much cash you need.

Step 5: Budgeting

When we say budgeting, we are talking specifically about your business expenses annually. When creating a budget, the goal for existing businesses is to evaluate historical revenues and expenses to plan for the upcoming year, while the goal for new businesses is to create the most comprehensive detail of anticipated expenses. One thing we recommend is to break out payroll and irregular expenses from this into a separate area.

Step 6: The Cash Forecast

Your Cash Forecast will allow you so see what your cash position is projected to be monthly. You can do this by breaking up your monthly revenues, budgeted expenses, and irregular expenses on the Cultivate Cash Forecast worksheet. This is going to be a living document that may even change daily with updated information, but it will allow you to see which months you will make a profit, and when you will run out of cash.

All of these resources, worksheets, and more are available with a free Cultivate membership.