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Determining whether your new idea for a startup business is financially feasible is very difficult. As we discussed in the previous article, you do not have historical data to build your sales forecast. The financial section of your business plan should be the last section that you complete because it is built upon the work done in the other sections: determining your market, startup costs, and sales forecasts.
If you need financial assistance in starting your business, this section of your business plan is critical. It tells investors and creditors whether you will have the ability to repay their investment in your company. On the other hand, it may tell you that you should not go into business because the business idea is not going to be financially viable. Just remember that a financial projection is based upon an educated guess on future sales.
Even if you do not need financial assistance starting your business, this section of your business plan will help you set goals and establish mileposts to measure the success of your new venture.
For a start-up company, most investors and lenders want to see three to five years of cash flow projections. The first year should be on a monthly basis, the second year on a quarterly basis, and the third through the fifth year can be annual numbers. Essentially, a cash flow projection is an attempt to predict what your future bank statements will look like. Will you have spare cash at the end of each month or will you need financial support to pay the expenses until you become profitable? When preparing your cash flow projections, we recommend that you prepare two versions – a conservative projection and an optimistic projection. The most important part of preparing your cash-flow projection is to be realistic.
Since most start-up businesses experience a "cash flow crunch" at some point, this is an important exercise. If you spot a future shortfall, it gives you time to approach investors or lenders about a bridge loan. A cash-flow forecast will:
Download our complimentary Cash Flow Template to make it easier to complete your cash-flow projection.
There are four distinct parts to a cash-flow statement for the financial section of your business plan.
For the first year of the financial forecast, income and expenses should be projected on a monthly basis; the second year, the projection should be completed on a quarterly basis; and the third through fifth years, the projection should be completed on an annual basis.
The first row on the cash-flow projection will be your beginning, and the last row will be your cash balance at the end of the month.
In the previous article in this series, you prepared a sales forecast for a three to five-year period. This forecast will become the first section of your financial plan. In this section, you have forecast the number of units you expect to sell for the month, your projected sales price, and your projected cost of sales or production. This will give you the amount of money available to cover overhead expenses.
Most financial advisors recommend that you divide your expenses into two groups – fixed costs and variable costs. Your fixed costs include things like rent, utilities, insurance, and administrative payroll. Variable costs include items such as advertising and promotional expenses. The lower the fixed costs are, the less risk there is in the projection.
In the third section of your cash flow statement, you will include the projected purchase of any additional equipment you may need as your sales volume increases.
In the third section of the financial plan you should include your financing activities. This includes payments on term debt for equipment and real estate, interest payments on outstanding operating lines, loan advances to cover shortfalls, and operating loan pay-downs when excess cash is available. This section would also include purchases of equipment.
When you are preparing your cash-flow statement, you will need to take into account your business’s unique cash cycle. In reviewing your cash cycle, there are two factors that will impact your cash flow:
Investors and lenders know that your financial projections are not set in stone, but they do expect a realistic target. Anyone you go to for funding will test your income and cash-flow projections for reasonableness. Over the years, they have seen many overly optimistic projections, so they will be skeptical of any projection they review.
The quality of your management team or your own prior experience in successfully starting a new business can impact the investor’s or lender’s decisions.
Your cash-flow projection may require several re-iterations before you finalize it. This is very common. In addition, if you decide to go ahead and start your new business, you will need to update your plan frequently, especially during that first year.
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