One of the two mandatory requirements of applying for a startup loan (the other being a written business-plan) is a simple cash flow forecast. Indeed, most ‘delivery partners’ provide startup entrepreneurs with a spreadsheet template to do it.

But when I was road-testing a new approach to creating financials for this purpose I talked to a number of loan applicants and I found that this almost universal format is a fundamentally problematic document. It was apparent that it does the entrepreneur no favours when it comes to helping them understand either their own projected finances, or the basic accounting principles that underpin them and they find them difficult to understand and work with.

There’s a simple, fundamental principle at the heart of this problem and it’s surprising it seems to escape so many finance professionals involved in the process.  It’s simply this:

Cash flow is an output – not an input

Asking someone to input their cash flow is just illogical. It’s true, some elements of a cash flow are straightforward direct inputs – the figure for your loan for example, but the majority – and arguably the most significant parts – of a cash flow are a calculation based on other things.

Cash flow is the result of what you know or guess about your projected income and expenditure and in particular about the payment terms relating to those transactions and the impact of VAT on them, along with many other factors such as opening debtors or creditors.

So I’d argue that expecting someone – especially an inexperienced entrepreneur who probably lacks a great deal of financial knowledge – to input their cash flow is like asking them to provide the answers, without telling them what the questions are.

Cash flow can only be a result: it doesn’t exist in it’s own right. It has to stem from a large number of assumptions, especially around projected ‘profit & loss’.  It seems obvious that what’s required is a spreadsheet template which asks these questions – questions which the entrepreneur can answer – and provides the resulting cash flow as an output. Not an input!

A better way to create your financial forecasts

I provided a process and a spreadsheet tool, which was designed with this in mind, to six entrepreneurs who were in the process of applying for a loan and had previously been asked to work with the standard format template. The response was universally positive.

And it transpired that the major benefit they saw was not just the ease and speed of the production of the figures they needed, but that it provided them with a logical structure that made sense to them and gave them a much more solid understanding of their business finances in basic – but professional – accounting terms.

They also appreciated the way it allowed them to flex the underlying issues and variables they were faced with (something you simply can’t do effectively in a template which just asks you to input your expectation of the resulting cash flow).

Is your forecasting template up to scratch?

Delivery partners tell me that their templates work and are fit for purpose. They also tell me that inexperienced entrepreneurs (their main client-base) have neither the appetite nor the ability to take on board the complexities of a straightforward P&L-driven cash flow model.

These same entrepreneurs have told me different. They value coming to understand their numbers in the professional context that all business finances are measured, and that, in fact, they found it easier to deal with.

This isn’t difficult to achieve and I believe we do them a great disservice if we foist upon them a requirement to address their numbers in a fundamentally illogical, unprofessional way.

Find out more and book your forecast

To learn more about how Edge Forecast provides an inexpensive, effective and educational solution to forecasting for start-up loans, click here.

To discuss this unique service for your own or your clients’ needs, call Simon Thompson on 01225 438438 or fill out your contact details below:

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