Starting a business is an exciting but daunting process. One of the main worries is usually: “Are we going to run out of money?” So, as a startup, it is essential to prepare a cash flow to show how the bank balance might vary and to highlight any shortfalls in funding. It is also essential to open a business bank account to keep the business money separate from personal money.

In this blog, we outline what you need to take into account when it comes to cash flow for startups.

Mapping out your startup’s cash flow

An Excel spreadsheet is the best tool for creating your startup cash flow and we recommend mapping it out weekly, showing the bank balance at the start and end of each week.

Below, we look at the different items you must include when creating the cash flow forecast for your startup:

Capital introduced

A startup business is usually funded by savings, so the first income into the business bank account will be money introduced by the owners. You should put this lump sum as income on a line called “capital introduced”.

Turnover

You then need to complete one of the most difficult lines on a cash flow for a startup: the turnover. You need to research as much as possible to estimate what you think your weekly income will be. 

For example, if the startup is a café, it’s worth breaking this down into the number of coffees, slices of cake and lunches per day and vary this for the days of the week/season of the year etc. Ask yourself how long it will be before you reach your target turnover. Do as much work as possible to get a realistic figure.

Most startups are not initially VAT-registered until their rolling twelve-month turnover exceeds £85,000. So, you can leave VAT out of the cash flow unless you are acquiring a business as a going concern which is already VAT registered.

Cost of sales

Following on from turnover is the ‘cost of sales’ line. If the startup is a café, the cost of sales will be the raw materials. Initially, you would have to stock up and thereafter you would be topping up weekly. To calculate the weekly top-up, you need to know what your gross profit percentage will be. 

Armed with this figure, you can then calculate the cost of your raw materials in line with your projected turnover. A lot of suppliers have 30-day payment terms so the actual payment of the cost of sales will be deferred by one month from purchase.

Overheads

All the overheads should also be mapped out on your startup cash flow. It is easiest to start with the fixed costs of your business such as rent, rates, bills and insurance. You may have negotiated a rent-free period to help you get started – if this is the case, be sure to start the rent payments in the right week.

One-off costs

Then, you need to put in any one-off costs that you might have, such as the construction of a website, purchase of equipment, decorating premises, legal fees and more.

Employee costs

If you are going to employ people then you will need a line for their net wages and salaries and another line for the payment of PAYE and NI to HMRC. To calculate the net wages figure for each employee, you can use our payroll calculator.

If your PAYE/NI payment is likely to be less than £1,500 per month, this can be paid quarterly i.e. by 22nd July for the quarter to 5th July. If the amount is going to be more than £1,500 per month then it needs to be paid each month by 22nd following the pay period to the preceding 5th of the month. So, the PAYE/NI for the pay period to 5th July has to be paid by 22nd July.

Variable costs

Then you have variable costs such as telephone costs, stationery, travel, advertising, bank charges, motor expenses, sundry expenses and accountancy (accountancy could be a fixed monthly cost if you use our subscription service).

Personal drawings

Lastly, put in the figure for what you need to draw from the business to fund your private costs. If your business is set up as a limited company, the salary you draw each month should be on a director’s salary line with PAYE/NI paid over as with your employees. If your startup is unincorporated then the sums you take personally are called drawings and there are no PAYE/NI considerations at this point.

A note on corporation tax

If you are plotting a cash flow for more than twelve months and you will be trading as a limited company, you will need to include the payment of corporation tax twenty-one months after your date of incorporation, with another payment nine months after your year end. If you are trading as unincorporated, you can still include your personal tax payments and these will fall on 31st January and 31st July each year. However, these will not start until after your first year of trading. You will need to ask your accountant to estimate your tax payments for you in either scenario.

Using your startup cash flow forecast

Once you’ve plotted all of these lines, you will see how your bank balance ends up at the end of each week and you will see any crunch points where you might run out of cash. This cash flow will be a very powerful tool for your startup and should be updated regularly to ensure that the business is adequately funded.

It’s important to note that you do not have to put the turnover in first. It can be a very powerful exercise to plot your fixed costs and initial set-up costs and then work out what your turnover has to be to cover those costs alone. If that is easily achievable, then it is worth carrying on with the cash flow.

We hope you have found this blog on cash flow for startups useful! If you think you might benefit from our assistance with creating your cash flow, you can view our packages. Alternatively, if you would like to talk through any of the above then please give us a call on 01392 360008.