Cash Flow Forecasting

Forecasting the cash flow needed for a new business or project gives you signal on when you need to course correct — and even when you need to quit.

A photo of someone counting one-dollar bills in their hands.
Photo by Alexander Grey / Unsplash

Last time, I said:

Constraints mean starting with less money so you have to launch faster. I’ve earmarked a chunk of my business’ retained earnings to run Two Common Cents Club for a year, and not investing anything beyond that. If I can make it self-sustaining by then, it’s a success.

And I promised to share the tool I put together in today’s article.

But first, a story.

A Mission, Failed Successfully

I started my business, Dropped Bits, in January of 2012. I registered domains and social media accounts, printed fancy business cards (really, Angelo?), incorporated the business, and started spending on the tools I needed to build apps.

Two years later, I launched my first iPhone app on the App Store. About a year after that, I launched a second app. In 2020, I launched my latest app — the first one that got any real marketing.

By the end of 2020, I’d made a sum total of a couple hundred dollars from app sales. Not even enough to cover the yearly Apple Developer Program fees I'd paid since I founded the company.

Yes, it was nice to finally release an app that had some small measure of financial success. But in the meanwhile, I had personally sunk several thousand dollars into keeping the business afloat.

Why? Part of it was that I didn’t do proper market research and marketing, for sure. But the biggest issue, in my opinion, was that I didn’t have a cash flow forecast.

Cash Flow-casting

When you’re starting a new microbusiness project, it’s important to understand just how fast you can get to profitability. It’s so easy to get caught up in building your product or service, registering domain names and social media accounts, and producing the marketing content that will (hopefully) drive sales. But without a clear understanding of your cash inflows and outflows, you can end up in my situation.

At its essence, cash flow is pretty simple to understand: the amount of available cash is equal to the amount of cash that came in, minus the amount of cash that went out.

But when you dig into it a bit more, there’s a little more nuance to it.

  • You can save a lot of money by opting for an annual subscription over a monthly subscription, but are you setting aside money every month for the renewal next year?
  • You can run a microbusiness with little more than a laptop and a phone, but are you setting aside money for replacing them?
  • It’s relatively easy to see your expenses for the next six months to a year, but what about your sales? Do you need to adjust your pricing? Your marketing budget?

Forecasting your cash flows is essential for these things, and I did a terrible job of that with my own business.

This article is sponsored by Per, a free iPhone app by Dropped Bits.

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Planning to Fail, Fast

Okay, I know what you’re thinking. Forecasting your cash flow doesn’t sound like the kind of thing that would have helped me — after all, they’re just hopeful predictions, right? What if you guessed wrong about your pricing or user churn? What if the market changes?

In other words, what difference does it make?

Okay. Fair question. The answer is pretty simple: those things will happen regardless of whether or not you’re forecasting your cash flow, but you’ll be better equipped to course correct —or outright quit— if you understand your cash flow needs.

Let’s take this website as a concrete example. It’s a new project that I consider a separate business line.

I’ve got some running fixed costs: I pay for Ghost Pro, Google Workspace for email, a couple of domain names. There are other overhead costs, but they’re funded by currently-profitable endeavours.

I also have a few lines of revenue that I’m hoping will make it sustainable: a paid subscription product (thank you to my subscribers! ❤️) and a sponsorship slot that, once the site develops more of an audience, I will try selling spots for.

How I price these is of course in line with the typical market rate. But I’ve also got to think about the marginal costs associated with each sale: fees for processing payment, for example. As member numbers go up, I’ll have to upgrade my Ghost Pro subscription. I need to factor all of that in.

An additional thing to keep on my radar is the cost of foreign exchange. My business is based in Canada, but many of the costs are in U.S. dollars, so they’ll vary by a material amount (up to 5% or so) on a month-to-month basis.

By forecasting all of this, I can figure out my burn rate: how much money do I need to spend to keep things running?

Once I know this, I can figure out my runway: for a given investment, how long can the business run without making any money?

(Aside: financial terms are such a hodge-podge of mixed metaphors. What does a burn rate have to do with a runway?)

So now I can comfortable say that I need, for example, a minimum investment of $500 to keep the business running for a year. I can set milestones for each quarter on subscriber growth. Over that time, I can see what readers are more interested in and adapt what I’m writing about to better answer their questions. I can figure out how to best drive traffic to the site.

(That, of course, is a whole other thing that we should talk about, in a future article.)

Moreover, this gives me permission to fail fast. I love writing and I love helping tiny businesses succeed. But if I see, as time goes on, that this website doesn’t become profitable, I have enough information to shut it down and call it a lesson learned.

(My calculus for this is more complex than just, “does it make more money than it costs?” We’ll talk about loss leaders in a future article.)

That was something I didn’t allow for as I was getting my business started. For years, it was about endlessly pushing without a clear understanding of when I should try something different; maybe this app update would get me featured on the App Store, or this pricing change would drive up sales, or the next app… yeah, the next app, that’s the one that’ll make it successful.

I was an endless tap of investment that would keep the business going no matter what, so I didn’t have to do the hard work of entrepneurship, of running a business; I could keep on being the artisan executing on his craft and wrongly believe that customers would find me and have a need for what I was making.

The Promised Tool

Okay, so that's the backstory. Here's the link to the Google Sheet I created for you!

This will copy the link to your own Google Drive. I'll update this periodically based on feedback, so please let me know what you'd like to see added!

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Jamie Larson