How to Project When Your Startup Will Run Out of Cash

You will start by projecting your sales.  This isn’t simple, but you can either project sales based on your past performance, or based on competitor data.

For now I am just going to input some data into our tool for each of the first 12 months.  We will start by creating a new product and entering in some basic assumptions including the price of the produce and the Accounts Receivable Terms – this is how long it takes us to get paid.  In this example we are assuming it will take 45 days to get paid after we make the sale. data.

Now I enter in the number of units I expect to sell of “New Product #1” for each of the first 12 months as seen below:

Next we get started with projecting our expenses.  We start by setting your Accounts Payable Terms which is how many days you take to pay your bills.

So as you can  see here we are projecting that you typically take 25 days to pay your bills, and from above we know that your customers take 45 days to pay you, so you will have some inherent cash flow challenges.

3. One Time Expenses

Now we look at those pesky one time annual expenses that tend to creep up on you.  You think you are doing well because you made a profit the first 4 months of the year, but you forgot that in month 5 you have to pay $5,000 in property taxes that will eat away all of your profits to date.  So with ProjectionHub you can enter in those one time expenses ahead of time to help you predict when you will run out of cash.

4.  Bad Debt Expenses

It is a fact of life that some customers just won’t pay.  You should come up with some percentage of sales that you don’t expect to receive payment for.  Maybe that amount is 5%.  I entered a percentage for miscellaneous expenses which includes bad debt expense and other unexpected expenses.

Now that we have entered in all of our basic sales and expense data into ProjectionHub, lets look at the resulting Excel file that the tool produces, and check our cash flow statement to see if we run out of cash.

Awesome Startup Runs Out of Cash in Month 2

So without a capital infusion our startup is already in the red in month 2, and it only gets worse from there as you can see below:

Now we need to think of plan B.  What if we could get a small loan to start the business to help with cash flow.  Let’s enter a small $15,000 business loan at 6% for 24 months starting in month 1.

Now with this infusion of cash let’s go back and check how our cash balance is doing on the spreadsheet that ProjectionHub produces for us.

You can see that we stay cash flow positive through month 7 now that we have this loan, but maybe you would like to expand your vision for the company a bit.  You are going to need to quit your day job to work on this full time, and you are going to need a salary to pay your personal expenses.  Let’s start you out with a meager $3,000 monthly salary starting in month 6.

Now there is a small problem because if you look at month 7 above you have a cash balance of $5,896, but we just added $6,000 worth of salary expenses for month 6 and 7, so you are going to end up in the red again in month 7 if you don’t raise more capital.  This time let’s think about finding an investor.  Let’s assume you are planning ahead in month 3 and see that you are going to run out of cash if you start taking a salary, so you call your rich uncle and convince him to invest $15,000 in month 5.

Finally, let’s look how this investment sets you up going forward.

Congratulations!  Look at the influx of cash between month 5 and month 6.  You are going to survive, and  your startup won’t run out of cash.  Now why don’t you take some time to play around with ProjectionHub and run various scenarios to determine if and when your startup will run out of cash.