How much money will I need over the next 3 months? Every startup should do this cash flow check
3 min
Why you may be underestimating your cash flow as a start-up entrepreneur
Let's look at three common pitfalls and how to avoid them:
1. Focusing on turnover rather than timing
Imagine you are a self-employed consultant who finishes January with three major assignments. You have sent the invoices, but your clients will only pay after 30 or 60 days. In the meantime, you still need to pay rent, VAT, and other fixed costs.
Alternatively, imagine you run a hair salon where December is extremely busy, but January is quiet. Your fixed costs, such as rent and social security contributions, continue regardless, even during quieter months.
In both examples, money is on its way to your account. Yet you still risk facing a serious shortfall.
2. You forget about major recurring costs
Some predictable expenses still come as a surprise because they are not at the forefront of your mind every week. Such as:
- VAT returns (quarterly)
- Social security contributions (quarterly)
- Insurance premiums (annual)
While these costs are not unexpected, they simply aren't at the top of your priority list. Until, that is, the invoices suddenly arrive and a shortfall threatens.
3. You have estimated your income too optimistically
You are a passionate start-up founder. Optimism comes naturally to you. This is a good thing and a real strength as an entrepreneur. However, when it comes to forecasting your cash flow, it can be risky. The following two scenarios could get you into trouble:
- That quote you are counting on only comes through two months later.
- That regular client who always pays on time is experiencing cash flow problems this month.
Tip: Base your planning on 80% of your expected income. This will account for any delays or setbacks.
How do you plan 3 months ahead? A step-by-step plan
You certainly don't need complex accounting. What you do need is an honest and realistic view of your finances, so that you can make the right decisions.
Step 1: List your fixed expenses
Write down all the costs that will be incurred regardless of your turnover. For your business, these may include:
- Rent
- Salaries (including your own remuneration as a company director)
- Social security contributions
- Insurance
- Subscriptions (e.g. telecom, software)
- Leasing costs
- Loan costs
- Energy costs
Add up all these costs for the next three months. This is the minimum amount that your account must be able to cover.
Step 2: Estimate your income, but be conservative
- If you are a consultant or freelancer, consider your current projects and how much you can realistically invoice. However, bear in mind your clients' actual payment terms. For example, an invoice dated 1 February that is only paid on 15 March will not help you in February.
- If you are a shop owner or service provider, use your average weekly turnover from recent months, adjusting it for seasonal effects. Do you have quieter weeks? Include these in your calculations.
Then take 80% of your expected income to build in a safety margin.
Step 3: Identify the gaps.
Subtract your income from your expenses month by month.
- When does your balance become negative?
- When does your balance come dangerously close to zero?
These are your 'risk moments' and the ideal time to take action.
What should you do if you expect a shortfall?
Speed makes all the difference. Ideally, you should build up a buffer, but as a start-up entrepreneur, you often don't have one yet. Here are a few alternatives:
1. Credit facility or bridging finance:
- Apply for a type of credit before you actually need it. Banks and financial institutions are more likely to help entrepreneurs who plan ahead. If you are already experiencing difficulties, it becomes much harder.
- Imagine your forecast shows a €8,000 shortfall in three months' time. This is the time to start the conversation, rather than waiting until the shortfall has already occurred.
2. Accelerate your invoicing:
- Offer a small discount to customers who pay quickly (e.g. 2% for payment within 10 days).
- Use automatic payment reminders for outstanding invoices.
3. Postpone or spread out costs:
- Negotiate payment terms with suppliers.
- Check whether you can pause subscription costs (e.g. software) or pay monthly instead of annually.
Make it a habit: the 3-month rule
The value of this exercise lies in both the result and the consistency. If you review your cash flow every month — or even every two weeks — as a start-up entrepreneur, you will no longer be caught by surprise. You will spot problems early and have time to adjust.
All you need is a spreadsheet, half an hour and the discipline to ask yourself some uncomfortable questions. Alternatively, you could have a good conversation with someone who can help you with that.
Get personalised advice about your cash flow
Have you identified any gaps in your cash flow? Contact your BNP Paribas Fortis advisor for personalised advice.