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How to create a cash flow forecast

bills39158685.jpgOne of the best ways to manage your business's finances is to create a cash flow forecast. The reason for this is that a cash flow forecast is going to show you where your business's money is going and how much money your business is earning. Cash flow forecasts are also going to be needed if you plan to get finance for your business.

Here are the steps you will need to take to create a cash flow forecast.

Step one:
You will need to start with your pre-start-up position. This section is going to help you determine the type and amount of debt and equity financing that your business needs, along with what type of financing will work best for your company. This section will also allow you to see the initial amount of money that you are going to be spending to get your business ready to open and how much money you will have left over to start running your business with. To determine your total start-up cost you will need to add the cost of equipment, inventory, land, buildings, loan payoffs, and onetime pre-start-up expenses such as pre-paid insurance or rent. After getting the total, you will want to deduct the total from your available equity and loan start-up funds to figure out how much cash you have left over. If the amount left over is negative, you will need either to raise more capital for your business or not open your business because it will not work.

Step two:
You will need to determine your sales forecast, which will tell you if your cash flow will support your business. You need to start by figuring out what your yearly sales will be, which is going to depend on a variety of different factors. You are trying to determine if there is a positive outlook for your industry. If there is a positive outlook, you will also need to look at how many customers will walk into your business and purchase something from you. You will need to provide a sales forecast for each product or service that your business sales.

Step three:
You need to determine the cost of goods sold for your business. With the cost of goods sold, you will need to include the dollar value and the percentage of sales that the costs represent. To figure out the percentage contact the supplier for the price you will pay for the products and the suggested retail price for the product. Make sure that the percentage falls into the industry average, so that your business is comparable to others in your industry.

Step four:
Next, you will need to determine your expenses. When determining your expenses you will need to have good estimates and proof of the various expenses. You will also need to include any credit card payments in this section and provide a breakdown on what goes into principle and what goes towards interest. This should be done for each loan or credit card that you have.

Step five:
If you plan to pay yourself, you will need to include that amount in the cash flow statement. One way to determine how much to pay yourself is to find the average percentage for owners' compensation for your industry and multiply it by your projected sales or you can determine your personal expenses for the year and just take out that amount for your salary.

Step six:
You will need to consider your income taxes that have to be paid each year, which will be both federal and state income taxes. The average amount that a business pays is around thirty to forty percent on their net income after depreciation.

Step seven:
After everything has been calculated you will have the amount of cash that your business will have leftover at the end of the year or the quarter, depending on how you are preparing the cash flow statement. This number needs to be positive in order for the business to work.

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