Cash Planning
The first question
you want to answer is: How much money will I need? But this question can't be
answered until several other questions are answered and several decisions are
made.
To decide how
much money is needed to start a business, enter all of your potential income
and all of your planned expenses on a work sheet or form.
Even though you
may feel that this kind of planning is more than you need to start a simple
small business it is useful to get started with this approach to management
which puts figures down in black and white. You will find the same approach
valuable in an established business.
First, estimate
your sales volume. Obtain assistance in making your sales estimate from
wholesalers, trade associations, your banker, and other business-people.
Several business and statistical publications may be useful in making sales
volume estimates.
In reaching
your final estimate of sales do not be over-enthusiastic. A new business
generally grows slowly at the start. If you overestimate sales you are likely
to invest too much in equipment and initial inventory, and commit yourself to
heavier operating expenses than your actual sales volume will justify. Since
you are just starting up you might have no sales for the first few months. At
any rate you can expect your first few months to be very low.
You must also
determine what proportion of your sales will be cash and what proportion will
be sold on credit. If you estimate that a certain portion of the sales will be
on credit then you must figure when you are going to get the money for these
sales. One month? Two months? More? Never (Bad Debt)?
Next, estimate
how much cash will be paid out. Remember that in starting a business you may be
purchasing equipment, paying fees and licenses, making deposits on lease,
utilities and so on, several months before you open the door. Some of these
expenses are easy to estimate. If you have decided to lease space then you know
what your deposits will be and how much you will have to pay out each month.
You can probably get the cost of fees, licenses and utility deposits with a few
telephone calls.
Other expense
figures may take a little more work to get. One way is to obtain typical
operating ratios for the kind of business in which you are interested. Among
the sources for such ratios are Dun & Bradstreet, Inc., trade associations,
publishers of trade magazines, specialized accounting firms, industrial
companies, and colleges and universities. The typical ratios for your type of
business multiplied by your estimated sales volume will serve as bench marks
for estimating the various items of expense. However, do not rely exclusively
on this method for estimating each expense item. Verify and modify these
estimates through investigation and quotations in the particular market area
where you plan to operate.
Don't forget to
pay yourself too. You may need money to live on if you have to quit your job.
If your spouse is working and can support the family for a while you may not
have to withdraw money from the business. The longer you can go without taking
money out, the quicker you will build up a strong cash position. Now that you
have estimated your cash receipts and expenses, write down the amount of cash
you will put into the business to start.
Don't forget to pay yourself too. You may need money to live on if you
have to quit your job. If your spouse is working and can support the family for
a while you may not have to withdraw money from the business. The longer you
can go without taking money out, the quicker you will build up a strong cash
position. Now that you have estimated your cash receipts and expenses, write
down the amount of cash you will put into the business to start.
Video: on Youtube: Business Video page:
No comments:
Post a Comment