1) Cash generated from income

2) Cash required to produce income

3) Cash required for any overhead salaries and benefits

4) Cash required for occupancy

5) Cash required for production

6) Cash required for marketing activities

7) Cash required for general expenses

Now let’s look at each section one at a time:

This section will require you to estimate your sales, and how quickly you believe your clients/customers will pay you. This is the positive side of your cashflows.  If you have seasonal income, for instance:

Toys and gifts – heavier holiday sales

Accounting – year end, and tax season

Landscaping – summer

you may want to create a monthly or seasonal cash forecast, to ensure you can meet your monthly bills.

Where you sell multiple items, you may want to create a spreadsheet with an estimated number of sales, and the sale price of each item or service. This will provide you with the anticipated cash inflow, if you collect all of the cash at the same time as providing the item or service. If you allow customers and clients to pay you on credit terms, you will have to take the credit terms into account. As an example, if you were to sell $10,000 worth, every month, and this is your first year of operations, and everyone pays you within 30 days, than your anticipated revenue will be $120,000 for the year, but you will only collect $110,000 during the year, as your last month of sales, will only generate cash in the following year.

If you are selling products, then this will be the cost of supplies. Whereas, if you provide a service, this will most likely be the cost of employees required to generate the fees. Based on your forecasted sales, forecasting the cost of product should be simplified. You should base your cost from suppliers based on the number and cost for each product or service. For example, if an item requires $10 worth of material and you are planning on selling 15 of them, then your cost should be $150. However, this may be impacted if your suppliers require you to buy a minimum quantity, or if you are planning on holding extra items on hand in case you have underestimated your sales.

Aside from the salary you plan on paying yourself, and your employees, there are additional costs that should be taken into account such as employee vacations, sick days, and benefits that you provide, pension plans, and of course the employers cost of employment such as CPP, EI, WSIB, EHT, termination costs, recruitment costs, and the like. You can either carry the cost of all employees in this section, or you can split them between this section and your cost of sale, if they are required to generate income. The best way to complete this section, is to list out all your employees, including yourself, with their pay rate, along with any employees you are predicting you will hire during the year.

If you are looking to terminate employees during the year, you should figure out what the cost of termination will be, based on their contracts, or legal requirement Remember to only carry their salary cost for the period you plan on employing them for. If you are looking to hire, and you are planning to use an agency, or anticipate having to pay a hiring bonus, you should account for it here.

You should also account for any employee training program costs in this section.

Your occupancy costs should be straightforward to predict. If you rent office space, then your biggest cost will most likely be your rent, which you should easily know. This section should also carry the costs of property taxes, utilities, cleaning, all costs which should be easy to predict.

If you run a home office, then these are the costs associated with the percentage share of the house that you have deemed to belong to your office space.

If you own the building out of which you operate your business, then these are all of your costs except for rent.

Do not include mortgage and/or loan repayments in this section.

This section covers all the costs of running your office, for instance:

computer leases, computer software license fees, and any other yearly computer cost. The cost of an internet connection, phone lines and cell phones, paper supplies, copying costs including any copier leases, cost of printers including toners, website costs if you have one, etc.

The easiest way to ensure that you have this section properly covered, is to list out all the items that your business requires and set a cost to each item. Your cash situation should determine the level of detail that you need to get into, based on how cash rich, or cash poor you are.

One of the ways to ensure this section is properly covered is by using the employee list that you have created for salaries and benefits and listing the items each of those employees requires with the cost for each. You may choose not to provide all your employees with cell phones as an example.

If your business requires you to travel, or if you have company vehicles, the costs of travelling or maintaining the cars, should be covered in this section, along with meals, airfare if anticipating any, etc. Don’t forget on including your holiday party costs if you are planning on holding one.

This section should cover all your marketing costs. This will include marketing materials if any, cost of a PR company, advertising, etc. If you are planning on attending seminars, group events, and trade shows, you should include the cost of these events including travel costs, meals, hotel, etc. in this section. The best way to forecast this section is by compiling a list of events you are planning to attend and the cost of each. Then determining the quantity of advertising that you are looking to undertake, and printing and design costs associated with marketing materials.

This section typically includes anything not covered by any of the sections above. As such, I like to call these, the cost of doing business with no business. This section will cover items such as your banking fees, interest expense, and income, legal fees, accounting fees, foreign exchange, etc. In this section you will include any interest required on loans, leases, mortgages, lines of credit, etc. You should also include any corporate taxes you are likely to pay, along with any installments, in this section.

The above items that I have listed, are for reference only. You should alter them based on your own expenses. Also, don’t forget to take payment terms into account on all your expenses, as you want to be able to predict your outflows, the same way as your inflows.

By adding up the sections above, you will have a view of how much cash you are likely to generate from your business operations.

Investing section:

Based on all the information you have compiled above, you should be able to determine, if you will need additional equipment to run your business, ie. computers, manufacturing equipment, cars, trucks, etc. Include the cost of any new equipment in this section. However, you need to deduct any amounts you will likely finance. Include repayments under existing and new payment arrangements for equipment in this section.

Financing section:

In this section account for any new loans that will be advanced to your business, and any payments that you need to make on existing financing for your business.

The task may seem daunting, but I believe that by breaking it down, into components makes the task of forecasting cashflows much easier to undertake, and as always, should you have any questions specific to your operations, or feel, that something may have been missed, feel free to ask.

Should you need help with your cashflow analysis, accounting, or tax issues, contact us today.