Preparing an initial cash flow forecast

A cash flow forecast demonstrates how you see money coming in and going out of your business on a monthly basis.

Your forecast will include:

• your estimated monthly sales figures
• less your estimated monthly expenditure.

You need to list all your known regular expenses, such as insurance, telephone, survival income etc and also your estimated expenses.

Why forecast – aren’t you just guessing?

No. Forecasting for your financial survival and success is arguably one of the most important aspects of your business plan. You need to have an idea now how much you’re going to earn every month and year. I say idea, because at this stage that’s all it is. Nobody can predict with any certainty what your earnings are going to be, how fast your business will grow and how quickly you will move from achieving your survival income to realising your success income – profit. But you can set objectives, targets based on what you know, and get a fair idea of what would be a reasonable assumption of what you should be earning. Having now completed some detailed personal and financial analysis you should be in a position to estimate your monthly expenditure.

If you’re planning to work at this business part-time, and your earnings will complement an existing income be this a wage from elsewhere or perhaps a pension, don’t forget to include this income (net amount) under additional receipts.

You may wish to plan your first year. Most business plans cover the first three years of trading.

When I first started, I found this impossible. Trying to work out sales in year two when I hadn’t yet found my first client in week one was frustrating to say the least.

Try six months initially and then when you feel your plan is realistic forecast the second six months.

Creating a cash flow forecast

The cash flow forecast below (Figure 1) can be copied and adapted to suit your own business needs. The principle will remain the same – receipts less payments equals net cash flow.

Monthly cash flow may be either positive or negative. Obviously your goal is to maintain a healthy, positive cash flow running through your business. However, this will not always be possible. Unforeseen circumstances may have a negative effect on sales, for example bad weather and the like, or something that requires you to take unexpected time off from your business. Therefore it’s essential when working out your forecasts that you do not spend all you earn. As I’ve said before, with this business most expenditure can be foreseen and therefore you should only spend what you’ve planned to spend. This includes the amount of money you take from the business to pay yourself, which is known as drawings.

Receipts

Generally you will only have receipts from cash sales. However, there may be occasions when you receive additional income via other sources, for example if you sell one of your business assets such as a lawnmower. For the purposes of your cash flow you will have:

• cash receipts (sales)
• other receipts (where you can include anything other than income from sales).

Payments

It’s important to create separate columns for all of the common types of expenditure that your business will encounter. Obviously, if you’re planning to run a gardening round where you cycle to and from each client you won’t need a column for motor vehicle expenses etc. The example below details the following monthly expenditures:

• drawings (what you pay yourself)
• wages and salaries (what you pay everyone else)
• insurance
• postage/printing/stationery
• motor vehicle
• telephone
• dumping fees
• fuel
• other
• stock/materials.

Notes on expenditure

Insurance

RL Gardening Services have two insurance policies:

• vehicle insurance
• public liability insurance.

Both policies are paid for in 12-monthly instalments, which equates to a monthly cost to the business of £63. This figure remains constant throughout the cash flow forecast as this cost will only change if the insurance is upgraded in some way to take account of a change in circumstance, for example an additional vehicle or an increase in public liability insurance resulting from taking on additional staff or risk.

Fuel

This is a variable cost and will change from month to month depending on the mileage covered, vehicle being used etc.

Drawings

In this initial cash flow forecast the proprietor of this business has allowed drawings of £500 for the months April and May, £700 for June and July, £500 for August, as this is when he expects to go on holiday and returning to £700 for September.

Telephone

The telephone bill will only be paid twice in this period as this account falls due quarterly. The first payment is made in April, the second in July with the next due in October.

Net cash flow

Cash flow is positive for the first six months of trading with the exception of August where there is a negative cash flow of -£154. If this was my business’s cash flow, I would worry about the impact of this and not take holidays until the business has become more established and financially secure.

At the end of the first six months’ trading RL Gardening Services forecast shows that the proprietor is expecting to have a cash surplus of £268 in the bank – but this will only be possible if both the financial expenditure and monthly sales targets are achieved.

Comparing forecasts with actual performance

Your initial forecasts are important in that they will give you, the business’s proprietor, a great appreciation of what sales you need to achieve to return your desired income. Working out your initial forecasts can be difficult until you fully appreciate the costs particular to your own business. Therefore it’s vital that you monitor actual performance against targeted or forecast performance and after the first six months you review all of your initial figures.

RL Gardening Services’ completed cash flow analysis for the first six month’s trading looks like this.

Observations on the business's actual performance in relation to its original forecast.

Sales

The business got off to a good start with sales exceeding original forecasts by £200. However, this had a proportionate negative effect on costs and we can see that fuel costs and dumping costs both exceeded original budgets.

In May, month 2, sales failed to reach target as they did in July. The shortfalls, however, have not had a damaging effect on performance as the business retained £224 cash in the bank at the end of its first six months, this being only £44 short of the original forecast.

The unexpected

In June the business’ vehicle broke down which resulted in an unexpected repair bill of £100. These are the types of costs that you cannot budget for. However, you must include some provision for maintenance in your forecasts. It would be wise for the business to put aside some money every month, provided of course the business remains in positive cash flow, to cover both unexpected costs and all of the annual costs, for example vehicle MOT, road fund licence, tool replacement etc.

Preparing a profit and loss forecast

While a cash flow forecast will help you predict what monies are likely to flow in and out of your business during any trading period, you may find it useful to prepare a profit and loss forecast.

The difference between a profit and loss forecast and cash flow forecast is that your profit and loss forecast will demonstrate how profitable your business is likely to be based on your anticipated sales and expenditure. It will be particularly useful for any business that sells goods as well as services.

Profit is calculated as follows:

Sales minus your direct costs: costs of materials and wages = gross profit.

Trading profit is worked out by taking your gross profit and deducting all your other business overheads and your drawings (what you pay your self every month).

Net profit is worked out by reducing any depreciation that you may be able to claim. Obviously net profit is the most important figure to concern yourself with as this shows how profitable your business venture is likely to be. The expression ‘bottom line’ comes from net profit as this is the final figure you arrive at.

Have a look at both the profit and loss forecast and the actual completed profit and loss account for RL Gardening Services.

RL Gardening Services do not have any materials or stock in their books. They simply provide labour. Many gardening businesses will be like this. However, if you’re planning to sell plants or provide any materials other than your own labour, you will need to include these costs in your forecasts.

Depreciation

Prior to arriving at your net figure you will see that depreciation is deducted from your trading profit. You are allowed to deduct a certain amount from the value of your assets to cover the asset’s wear and tear. This is something that you do not include in your cash flow forecast, and only arrives at the point where you’re ready to calculate your net profit.

Calculating depreciation

Contact your tax office for up-to-date information on depreciation allowances prior to completing any final accounts.

Contingency planning

Covering the ‘what ifs?’

You need to cover yourself in the event that you can't work. There can be a number of factors that can cause this:

• bad weather
• sickness
• accident at work
• family crisis
• personal problems
• other issue.

While you can’t write into your plan guaranteed solutions for overcoming each problem, you must have some form of contingency plan in place. Your business depends on you working, being out there doing what needs to be done. You don’t get paid for not working, for the days off you have to take when the weather is too lousy to do anything useful. If you have an accident and can’t work then you have no means of earning. Like it or not, gardening is a risky business. You’re far more likely to be injured gardening than you are being a victim of crime. Most injuries can be relatively minor, but some may require taking time off to recuperate. Obviously the best solution is to try to ensure that you stay safe and well and make sure that you adopt safe working practices.

Business insurance is essential

You should also insure yourself against being unable to work through injury or illness. I have an insurance policy that covers me in the event of my being unable to work due to temporary disablement through an accident at work. It’s worth contacting a registered insurance broker and seeing what is available. You’ll find those local to you in the Yellow Pages or Thompson Directory. Pick one that deals with business insurance and ask them to send you some information. There are a lot of insurance products on the market aimed at the self-employed businessperson.

Contingency measures could include:

• Having sufficient cash reserves available for a three-month period when you can’t work. Longer if you can manage it.
• Adequate accident insurance cover that pays a weekly sum in the event that you can’t work in your businesses.
• Making sure that you adopt safe working practices and continually monitor and look to improve upon your Health and Safety at work.
• Reducing the risks you take.
• Remembering that you, and you alone, are your service. If you can't perform, then you can’t earn.
• Looking after yourself.

Case study

As I’ve told you already, I launched my business because I had to. I did what everybody said not to do and walked out on my job. It was the only way that I could save myself from going insane. I’m not recommending or suggesting that you do the same. If your current job is truly awful and the reason you want to start your gardening business is to break free from all the pain, then great. But wait just long enough so you have a clear strategy and a little bit of know-how before telling them where to stick it.

My initial planning

In the months before I left I wrote a number of business plans and gave much thought to how I was going to start my business. My business began with a few humble cards advertising my services in some dreary-looking seaside newsagents. Tucked in between Angie’s Mobile Hair Salon, 10% discount for genuine (underlined) OAPS, Greenfingers Ladies Only Gardening Service and a whole range of other handwritten advertisements offering anything from a clapped out car to a discreet private massage, was my card, advertising Paul Power’s Gardening Service. It was a humble beginning. My initial advertising bill was less than £2.50. Having taken £5 with me, I invested the change in a coffee and Danish pastry. I was in business!

Then to my enormous disappointment two weeks had already passed and I hadn’t had a single call. It seemed that no one wanted my services. Disappointment turned to disillusionment and all the wonderful images of being self-employed began to ebb away. I was to learn my first hard lesson of running your own business:

You are responsible for own future.

Gone are those weary bosses. Gone too are those colleagues at work you shared your woes with. Now you are entirely responsible for your own destiny. You’ll enjoy the wonderful freedoms that being your own boss brings, but you must also find ways through that loneliness that this can bring.

Keeping a positive outlook is vital

I was already feeling low, having just walked out on a regular job, feeling positive was difficult anyway. No, impossible. Which is why I decided to take myself out of the house, where the walls were fast closing in, and off to a nice seaside cafe, where I sat sipping a coffee and working on a new business plan.

My previous plans had been cautiously optimistic. I hadn’t figured on not being able to find any clients at all, which obviously was a bit of a problem. So I spent the morning working on a sales strategy that included running an advertisement in the local paper. The more I worked on my strategy the more positive I became about my future. And by the time I left the cafe, psychologically I was back on a more positive footing. Even with no clients, no money and lots of bills to pay, I was still happy that I had chosen to start this business.

Why? Because I’d managed to figure out a way through my problems by identifying what was wrong and working on possible solutions. The mere exercise of doing this had changed me from negative to positive. Of course there was no guarantee my new strategy would work, but at least I was working on making my business happen and feeling better for it. Watching the poor waitress flying around the café, rushed off her feet, being barked at by her supervisor, had also made me realise that the dream of self-employment was worth fighting for.

Be prepared to be your own motivator

Whenever you feel down, get out of wherever you are, find somewhere you feel comfortable and take a fresh look at your problems. Don’t expect to solve them all. Just work on a few possible solutions. I believe that it’s so important to you and your business that you develop a habit of self-reliance. You have ample resources to pull yourself through the difficult times, and believe me there will be some ahead.

When I returned home full of positive energy again, with a new sales strategy all worked out, I nearly didn't see the red light flashing on the answerphone. But when I did, I was overjoyed. Finally, a call from my first prospective client!

‘Mr Power, I was wondering if you could help me. I’ve got a small side garden which is completely overgrown and needs something doing with it. Do you think you could fit me in?’

This lovely lady will never know just how much that telephone call meant to me. Finally (two weeks can seem an eternity when you’re waiting for the phone to ring) I had my first client. That morning I had felt dejected and down as I reluctantly pulled myself out of the bed to face another day in my struggling business. That evening, having visited that lady, quoted for what she wanted done, agreed the price and start date, it finally seemed that my business was up and running and for the first night in many weeks I enjoyed an uninterrupted night’s sleep. But there was still lots and lots more work to be done on the planning front as I was soon to find out.

Lessons learnt

• Learn to develop self-reliance as soon as you can.
• Nothing stays the same for long. No matter how terrible things seem, the bad times will pass.
• You can only find solutions by first identifying the problem. In my case, I was naive to expect floods of enquiries the moment I advertised my services.
• If everything is getting on top of you, take yourself off to somewhere you enjoy and do your thinking there.
• No problem is insurmountable.
• Being self-employed means just that – you are responsible for employing you!

When the going gets tough

When things go wrong, as they often do for any business, whether small or large, it’s easy to become negative and despondent. Unless you are fortunate enough to be surrounded by self-employed business gurus, already enjoying success, there can be little in the way of encouragement. Well-meaning friends, family and all sorts of people will leap to your defence with unhelpful comments like ‘don’t worry, so and so went out of business and they’d been at it for years’. We end up agreeing with them; it was a silly idea anyway. There you have one reason why two out of every three new businesses fail – because the owners weren’t prepared for the enormous changes that running your own business has on your life.

Is your idea viable?

So far in business planning you have looked at:

• How much money you need to earn each and every month to keep a roof over your head and the wolf from the door.
• Analysing your skills. By now you should have a fairly good idea of some, if not all, of the services you are going to initially offer to prospective clients.
• Cash flow and the importance of keeping money flowing through the business so that you can meet private and business commitments.

Are you prepared for self-employemnt?

Prior to starting I’d filled two A4 pads with projections, which ranged from the sensible to the ridiculous. Nothing wrong with that and I strongly urge you to work out as many projections as you possibly can. But what I hadn’t done was address the question of my own personal capabilities of running my own business. I’d never really given much thought to what it would be like to run my own show other than the obvious; that I’d be my own boss, no commuting, terrible office politics and having my future career managed and manipulated by people who I could only think of as idiots.

Was I really capable of running my own business and making it successful enough so that I didn’t have to become an employee again? In hindsight, I don’t think I was. Now if my phone didn’t ring for a few days, let alone a couple of weeks or longer, I would implement my direct sales strategies. We’ll look at what these are later, but for the moment I’ll just say that I now wouldn’t sit around waiting for business to come to me, I’d be out there actively looking for it.

Phones don’t ring unless you do something that makes people want to call you and ask for your help. That makes sense, but here's the difficult part – have you got what it takes to go out there and make your phone ring? Before you answer yes, take the self-profile test based on some of the skills that I either had when I first started, or quickly acquired after I launched my business.

The self-profile test

• 1.Are you somebody who constantly needs encouragement from friends, family and everyone else?
• 2.Do you enjoy working on your own?
• 3.Could you spend all day working in a garden without speaking to anyone, come home exhausted and do it again the following day and the day after?
• 4.Once you decide to do something do you do it, wait, or leave it until you’ve changed your mind?
• 5.Do you have lots of physical and mental energy?
• 6.Are you in good health?
• 7.Can you and you alone take responsibility for your own future?
• 8.Can you take responsibility and deal with difficult situations when whatever has happened wasn’t really your fault?
• 9.Can you deal with a whole variety of people, many of them wonderful and lovely to work with, some of them awful and people you’d normally avoid?
• 10.Can you learn to live with constant change and a degree of uncertainty and see these as positive, necessary things in your life?

This is not a point scoring exercise and it’s certainly not a horoscope, but from your answers you should be able to see what areas you’ll have to work at. This is an odd business in that often you’ll be working alone in a garden with only the birds and plants for company, while on other occasions you’ll be working so close to the homeowner that it’ll be like having a relationship with them. The gardeners’ world is full of extremes. Then there’s the weather, which can be anything from lousy to glorious. Can you learn to enjoy working outside in all weathers?

Summary

• 1.You must work out your monthly survival income.
• 2.Plan to survive first and then succeed.
• 3.Calculate your anticipated start-up costs.
• 4.Work out how you are going to finance your start-up costs.
• 5.Decide what legal entity will you will use, be it sole trader, partnership or limited company.
• 6.Work out an initial cash flow forecast.
• 7.Work out an initial profit and loss forecast.
• 8.Discuss your plan with those whose life will be directly affected by it – wife, husband or partner.
• 9.Give adequate thought to contingency planning.
• 10.Remember to be realistic in your planning.

Good planning requires solid preparation

You don’t have to have it all worked out at this very early stage. What matters is that you start thinking about these things and looking for answers to the questions. Face the music and calculate what your survival income will need to be – the most important figure at this time. Knowing how much you need to earn every month to meet your commitments is essential for the future success of your business. Without this information you could well be on the road to financial ruin, which is something to avoid at any costs even if it means you decide you are not financially sound enough at the moment to give up your job and start full-time. Remember, your initial objective in starting this business can be to clear your debt. Then when you’re not as over-committed as you are now, you’re ready to launch yourself full-time.