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 Preparing a Cash Flow Projection for Your Start-up

To prepare a Cash Flow Projection we have to assume that you know your market, and how you are going to sell your product.  If you don't, stop now.  You have a lot of research to do. 

Start out by projecting the total cost of your product.  Don't ballpark it.  You're going to need some fairly accurate numbers.  That means research and leg work.  To project the cost of your product you get prices from material and parts vendors for low quantity purchases.  Based on those prices your assembly parts for each unit should come to $99.00.  Your parts and materials vendors gave you terms of Net 30 days 

Unfortunately, it’s going to cost about $80,000.00 for molds and dies.  The terms of the purchase require you to pay 50% of the mold cost ($40,000,00.00) with the submission of your order.  The balance will be due upon delivery of the molds to your vendor.  You and your partner will borrow the $80,000.00 from the bank on a 5-year note.  Interest on the outstanding balance will be 9%.  That means that your actual mold cost will be close to $98,000.00.  With proper maintenance you should be able to produce, at least, 100,000 units from the first set of molds.  That will add $0.98 to each unit produced.  You add this in and estimate that the material cost for each unit will come to $100.00 ($99+$1). 

Next, you have to estimate the direct cost of your product labor.  You've reviewed the product with your partner who is a manufacturing guru.  The two of you estimate that it should cost no more for labor and packing materials than $130.00 per unit.  That will bring the direct cost of the unit/product to $230.00.  You add 30% of direct cost ($69.00)for overhead.  This brings your total product cost to $299.00.  You round the $299.00 up to $300.00.  If you tack on a 40% gross margin you can sell the product for $500.00 per unit.  You and your partner are comfortable with that price.  For purposes of this cash flow projection you're going to use an average selling price of $500.00.  

Your next step is to project your revenue for the first 2 years of operation.  The average selling price of your product will be $500.  Over a 2-year period you calculate that you should be able to sell 2000 units.  You know how you’re going to go about selling those 2000 units.  Selling 2000 units means that you received the order, built and shipped the order, and billed the order.  An average price of $500.00 per unit gives you a book-revenue for the 2-year period of $1,000,000.00 ($500 x 2000).

Decide how you expect the $1,000,000.00 in sales revenue to be received, shipped and billed on a monthly basis.  Don’t just divide by 24.  Be realistic.  It’s unlikely that you will be receiving any orders in the first 6 months, at least don’t count on it.  That means that you will be spreading the $1,000,000.00 revenue over 18 months instead of 24 months.  The business will build so you should be selling fewer units at the beginning of that 18 month period than toward the end   There may be a cyclical rhythm in your market that will affect how sales come in as well.  Build that into your projections. 

Then there’s the fact that you won’t be receiving all of the revenue billed in that 24 month period.   Assume that you can ship within 10 days after receipt of order, all orders will be shipped in the same month that they're received, and that you will bill immediately upon shipment. 

You contact the industry association, and find out that the industry average for invoices outstanding is 45 days.  You add 15 days to the industry average because you know that, being new, you will be at the bottom of the payment pole.  You estimate that your average collection period will be 60 days. That means that you’re not going to get $1,000,000.00 in cash over that 24 month period.   You’ll get something less than that. 

At this point your Cash Flow table should look something like the one immediately below with a line for "Receipts" below that of "Sales" .  (The table below has been abbreviated to 9 months because of space.)   Remember that you're running your projection out for a period of 24 months.  That means that when you accumulate your numbers you will accumulate them for the full 24 months.  There will be no totals such as quarterly, semi-annually, annually 1 year.  

Now that you can see what your projected billed sales should look like in the first 12 months of operation you might want to make some adjustments, particularly in the second year.  If you feel comfortable with the sales picture that you described in the first year (12 mos.) your 2^nd year monthly sales picture might be unrealistic?  If you have to STUFF monthly sales into the 2^nd year to make the $1,000,000.00 mark it’s possible that $1,000,000,000 was high.  This is the time to make adjustments. 

You do know that you want to have 25 units on hand to start.  It will take 3 months to build the dies and molds and 30 days, max, from the date your vendor receives your order until the date that your vendor ships your order.  You have to pay your vendor 30 days from date of invoice, and your average receivable will be outstanding for 60 days.

The table that you just prepared will show you how your projected monthly revenue will flow into the business for your first 24 months of operation (We only showed 9 months). It’s time to look at your cash outlay and see how it matches up with your cash receipts.  The relationship between cash received and cash expended each month, accumulated over time (in this case 24 months), is your monthly cash flow.

At this point you need to set a commission and salary payment policy. We will use commissions of 10% of net selling price, and they'll be paid when you receive customer payment.  Salaries will be paid bi-monthly.  Show your salary, and the salaries of any of the other owners of the business separately as “Officers Salaries” and "Officers payroll taxes".

Your next step is to make a list of all of all expenses that you can anticipate and determine if it has to be paid weekly, monthly, quarterly, semi-annually or annually.  Since the cash flow analysis that you’re preparing is monthly, multiply your weekly payments by 4.3 and use the total.

We’ve come up with a list of possible cash expenditures as an example, but it’s only an example.  Don't just copy our list of expenses,  Think of the expenses that your business will, or already does, incur.  Use those expenses in preparing your cash flow projections. 

• Rent
• Telecom
• Utilities
• Water
• Officers Salaries
• Taxes on Officers Salaries
• Salaries
• Taxes on Salaries
• Insurance, Health
• Business Licenses and Taxes
• Bank Note (5 yr. term for molds and dies)
• Marketing Expenses
• Travel and Entertainment
• Commissions (10% of sales)
• Material Vendors (20%sales)
• Office Supplies
• Plant Labor   
• Taxes Plant Labor

After you've identified and listed your individual expenses group them by how they're paid (weekly, monthly, semi-annually, annually), and insert them in the monthly column in which they will be paid. Total your expenses for each month. List that total as “Cash Paid Out for that month.  Next, subtract the total “Cash paid out” for each month from the total “Cash received from Sales” for that month(receipts). If the net amount is negative put it in brackets ($).  We put our negative numbers in red to conserve space.   

As you can see in our table listed below we've grouped our expenses by period of payment (i.e., monthly, semi-annually, annually).  This is a convenient way of generating a Cash Flow analysis.   You can follow this approach, but we recommend that you itemize your expenses.   When you come up with a number you should be able to answer specific questions about how you arrived at that number.  So  you're going to have to itemize sooner or later anyway.  It's best to do it now.  

We've only gone out 9 months in the table below due to space limitations.  When you prepare yours go out the full 24 months. 

You’re getting close to the end.  Now,  subtract your total Cash Out (paid) for each month from your receipts for that month.  That will give you Net Cash-In for that month  If the total is negative put it in brackets.  To conserve space we've put negative numbers in red instead of brackets.  

Cash on Hand for a start-up is going to be the amount of capital put into the business by you or you and your partner(s).   It's extremely difficult to get an Angel to invest in a company where the main participants do not have anything but sweat equity invested, although it does happen.  We've used a figure of $100,000.00 for initial capitalization (see Cash on Hand month 1).

Now that you have a figure for Net Cash-In for each month you will need to run a cumulative total by, month, of your "Cash Available for Operations" .  In our table below it reads as Avail. Cash . 

Your final step is to add Cash on Hand at the end of each month to Net Cash-In.  For a business just starting Cash on Hand in the first month will be the cash amount that you have on hand from  capitalization of the business.  In month 1 we've added Net Cash-In ($39,170.00) to Cash on Hand ($100,000.00).  This will give us Avail. Cash at the end of month 1 of $60,830.00 ($39,170.00 +$100,000.00=$60,830).  Cash on Hand in each month is the same as Avail. Cash in the previous month.  Run a second, monthly cumulative total, a 3^rd, 4^th, and so on for the complete 24 month period.  Again, if the net amount is negative put it in brackets ($).  In our example we use red number to indicate a loss instead of brackets.  With the numbers that we've used the business starts running a negative cash flow of $18,710.00 in the 3rd month.

In the table below itemized expense listings have been abbreviated due to space limitations.