Chapter 8: Start-Up Concerns & Financial Projections -Researching & Preparing Numbers

Learning Objectives:

1. Recognize the importance of numbers and how to keep score with them

2. Understand your responsibility in keeping track of numbers

3. Determine start-up costs

4. Discover ways to boot-strap your business

5. Focus on pricing as part of overall strategy

6. Determine seasonality scenarios

7. Deal with recessionary pressures

8. Develop sales projections and what-if scenarios

9. Prepare projected income statements

10. Learn that cash is king!11. Understand importance of the

balance sheet: assets – liabilities = net worth/owner’s equity

12. Determine feasibility and profitability through break-even analysis

13. Explore financial software options

14. Learn how to use industry financial ratios and benchmarks

Chart Your Business Future with Numbers

What will your start-up costs run? Which months will be strong? Which will be weak? What are your projected gross sales estimates? Can you project cash flow? What bank loans and other credit will be needed? How many employees will you need? What will they cost? Can you add people to the team who will bring cash? What is your burn rate and how long can you survive? How fast can your business grow? How will it affect cash? Are you prepared for handling money in the business?

Five Areas to Consider

Start-up Costs Can be minor or major Bootstrapping is an advantage

Pricing Low cost? Premium? Freemium? Dynamic?

Seasonality Scenarios Sales Projections What-if Scenarios

Income and Cash Flow Statements Balance Sheet, Break-even Analysis and Financial Ratios

Areas to Consider: A Closer Look Start-up Costs and Concerns

Compete a Worksheet & Prepare for unexpected costs Bootstrapping: Tips to Conserve

Get paid up front if you can & ask vendors for trade credit Lease equipment & run a lean operation with no waste Work out of your home or ask your landlord to make

improvements Resell what you can & take markdowns on dead goods Use as little space as possible – it doesn’t have to be attractive if

customers don’t visit your facility Shop around when borrowing & make your cash earn interest Add employees slowly and carefully Open a line of credit & make “conserve cash” youu mantra

Seek Financial Advice and Support

Action Step 38: Attach Price Tags to

Starting Your Business

Look around and list items you use every day List expenditures for things you cannot see

Insurance, Rent, Utilities, Taxes, Legal & Accounting Write down how much each expense will cost Use the start-up worksheets as guides to

develop your start up costs Refine the numbers as you go so you will

have an accurate representation of start-up costs for your Business Plan

Brainstorm a list of surprises that could cost you time, money or threaten your survival

Ask business owners about their surprises and how they handled them

Talk to vendors, suppliers, customers & insurance brokers

Estimate your total potential extra costs Decide how you will cover unforeseen expenses How much money should you set aside for

unexpected events?

Action Step 39: Preparing for Surprises

Areas to Consider: A Closer Look Pricing Your Product or Service

Price must be acceptable to you and your customers Don’t make the mistake of charging too little or too much Markups vary between types of business Many customers today demand discounts Common pricing methods:

Competitor-Based or Market-Based Pricing Cost-Plus or Profit-Based Pricing Industry Norm or Keystone Pricing Premium Pricing

Other pricing methods: Penetration Pricing and Price Skimming

Be flexible & expect changes when developing your strategy

Review chapter 5 action steps and revise if needed Use your answers to help develop your pricing strategy Gather information from various sources to develop a

list of activities and the costs you will incur Determine actual expenses involved with each cost

and activity Price your product using the primary method for your

industry Consider how you want customers to view your

product Discuss major pricing issues you need to deal with Complete a break-even analysis

Action Step 40: Discovering Costs and Developing a Fair Price

Areas to Consider: A Closer Look Seasonality Scenarios

Most businesses experience seasonal variations Seasonal forecasting will become easier after a

year in business Economic Cycles

Cycles hit specific businesses and the broader economy

Sales Projections and What-if Scenarios Sales drive everything else Every number in your Business Plan should have

back-up support

Write a seasonality scenario for a typical year in your business considering obvious forces

Answer the following questions: When does your industry collect money – before,

during or after the sale? Long after? When do you have to pay for inventory? What are the time lags between paying for

inventory and receiving money for selling that inventory?

Generate monthly numbers for the year and prepare an income statement including taxes

Action Step 41: Complete Seasonality Scenario and a Projected Profit and Loss (Income) Statement

Income Statements and Cash Flow Projections

An income statement demonstrates on paper when you are going to make a profit

Income statements track revenues and expenses but do not tell the whole story

A cash-flow projection shows whether you can pay bills and when you will need a cash infusion to keep going

Projections include more than just sales Cash-flow projections are a tool used to help

you control money

10 Critical Cash Flow Rules

Profits aren’t cash Cash flow isn’t intuitive Growth sucks up cash Business to business sales suck up cash Inventory sucks up cash Working capital is your best survival skill “Receivables” is a four-letter word Bankers hate surprises Collections Days, Inventory Turnover & Payment

Days If you’re the exception – hooray for you!

Balance Sheet

A picture of what your business owns and owes. Three categories make up a balance sheet: Assets (anything of monetary value

your business owns) - Liabilities (money owed to creditors)

= Net worth (owner’s equity)

Break-Even Analysis

If you know your estimated costs (variable and fixed) and gross sales, you can use a break-even formula that will tell when you will start making money

A break-even analysis is particularly useful: At start-up time When you have completed your income and

expense projections, and When you are considering launching a new

product or service

Leaving a Paper Trail and Software Applications

Download Starting A business and Keeping Records from the IRS

Don’t comingle business and personal accounts Track expenses and keep receipts Use a major accounting program to track your

financial activity Software should include word processing,

spreadsheet, database management, accounting and bookkeeping and website development

Financial Ratios

Calculating a few simple ratios will help you with analysis

Lenders use ratios to determine the risks associated with lending

Ratios are control tools for maintaining financial efficiency and staying afloat

Current Ratio: Does the business have enough money to meet current debts?

Quick Ratio: Do you have cash on hand to pay your debts?

Return on Investment: Return expressed as a percentage of investment

Think Points for Success

It is cheaper and easier to make mistakes on a spreadsheet before you go into business

When you visit your banker, make sure you know how much you are going to need in the long run

Projecting your numbers will help you understand and control the variables of your business

Purchase accounting software on day one Cash flow is king Remember Seth Godin’s advice: “The goal, no matter

what you sell, is to be seen as irreplaceable, essential and priceless. If you are all three, then you have pricing power”

Walk away if the business is not going to work financially