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03/06/08 Create a Winning Business PlanSession 3 Cash Flow ForecastPurpose When you’re out of cash you’re out of business! The cash flow forecast helps to anticipate cash problems before they occur so they can be avoided. For start-ups, forecast of cash flow can predict success or failure. For an on-going business, forecast of cash flow provides information on the condition of the business. Cash Flow Forecast Begin with 4 Basic Budgets Personal Budget Make sure minimal personal needs are met Start-up Budget Cash required to begin your business Sources of Funds: equity + debt Expense Budget Forecast of all expenses: Variable Fixed Sales Revenue / Gross Margin Budget Forecast of sales revenues and gross margin Comes from the marketing plan Personal Budget Personal Net Worth Start-up Budget Opening Inventory Sources of Cash Expense Budget Revenue/Margin Budget(from Marketing Section) Break-Even Analysis Break-Even Analysis Good Cash ManagementToo much cash is costly - too little is costly Critical to your operations Avoid too much cash – better to pay down debt Avoid too little cash – may lead to lost sales, missed discounts, higher costs Know your cash position – no surprises Spend carefully - Collect promptly Dangers to Cash Flow Low inventory turnover Slow pay receivables High interest expense; excessive debt Out of control expenses Too low selling price Missed discounts Shrinkage (inventory and cash) Cash Flow LimitationsA positive cash flow may not reflect… Unsatisfactory sales levels/patterns Sales may be high due to seasonality Bad expense controls Poor Profitability You could be liquidating inventory You may be slow in paying bills or could have deposited customer payments from previous period Poor cash management You may not have enough cash for non-recurring expenses, such as, tax payments Cash Flow ForecastSummary Goal: Sufficient cash to meet start up costs and reach the breakeven point When you’re out of cash you’re out of busin