“That’s how God created me. It is not my fault.”
You would think I was talking to someone about a mental illness.
“Can you do it for me?” I mean, I’m good at the visionary side of things, but I’m not a numbers person. And you know you always say to delegate things (awkward laughter).
I was talking to a client who wanted to turn his side business into a full-time business.
This person was not an artist unable to grasp the formality of numbers. He was someone who made his living dealing with facts and figures in a consulting role.
But with the simple introduction of a blank spreadsheet, he went from Mark Cuban to Homer Simpson.
“I mean, is it really necessary? I have confidence in myself and a cash flow projection is just a guess anyway. I really think it would be almost unethical to finish one since the numbers aren’t even real yet.
Yeah. He followed complete circular logic until he could justify not doing a cash flow projection because it was unethical. The cash flow projection that wasn’t for a bank was for itself, but still unethical.
For years, I have been coaching companies that want to start or grow.
This usually means that we usually discuss marketing, cash flow analysis or a capital injection.
Startups are the most fun and infuriating.
They are so excited and full of optimism, but also scared of their own shadow at the same time.
One of the first things I ask them to do is do a cash flow projection.
It’s also one of the first things they tell me they can’t do.
If you can’t see yourself as financially successful on paper, how will you be financially successful in real life?
Not to mention that it forces you to deal with how much money you need to get started and how much you need for working capital.
It would be like planning an elaborate vacation, but without looking at your bank account to see if you have the money to do it.
Sure, you can plan a week-long stay in Cancun, complete with excursions, but you’ll surely make sure the money is available before you book your flight, right?
Yet I see people do this all the time when starting a business and it’s one of the things successful business owners always tell me they did first or wish they had done. first.
Let’s make sure we start off on the right foot.
Below are the questions you need to answer to complete your cash flow projection.
How much money do you currently have?
Real dollars – no, I think I could ask my cousin Frank to lend me a few dollars.
What are the startup costs?
What items do you need to start the business and how much do they cost?
How much working capital do you have?
After subtracting start-up costs from the cash you have, all that’s left is your working capital. Think of it as a piggy bank that you can use to pay the bills, until you have enough company money to pay the bills.
What are the fixed monthly charges?
These are the expenses that must be paid whether you earn money or not. For example, insurance, marketing, payroll, rent, etc.
What are the forecast sales?
There are many ways to project sales and they are all more art than science.
If it’s a current side hustle, look at the amount of money you make now and the number of hours you put into the business and go from there.
If you currently put in 20 hours a week and earn $2,000 with it, then you earn $100/hour. Multiply that by the number of hours you devote to your full-time job and that’s the ballpark figure of what you can expect to earn in the first year.
What are the cost of goods sold (COGS)?
These are variable costs and are tied to sales.
For example, if you’re a carpentry business and you sell a table for $1,000 and the materials cost you around $250, that’s 25% of the COGS. Many COGS service companies would payroll to provide this service.
You turn your restaurant job into a full-time business.
$20,000 (you saved your net profit)
$15,000 (laptop, updated equipment, inventory)
$5,000 (start-up capital minus start-up expenses)
This means you have a piggy bank of five thousand dollars to help pay the bills as your business grows.
$3,000 – Insurance, payroll, marketing, administration costs, etc.
Average sale = $1,000/event
Your first full month, you’re only planning four events, because you’re still making a name for yourself
30% (food, materials, etc.)
In this case, $4,000 x 30% = $1,200 COGS
Less $4,000 fixed expenses
Equal = Negative $200 the first month.
Since you have $5,000 in working capital, that means you still have $4,800 in the bank.
If you have no additional income, such as a spouse with a full-time job, that $4,800 will need to be available for personal expenses.
Your goal will be to increase your number of sales each month, while keeping your fixed costs stable and also keeping a close eye on COGS.
The guy who works in consulting has never done a cash flow projection.
It was a rough start, but he turned it around and he’s fine now.
I asked him recently if he would have done anything differently.
He said, “Yeah, I wish someone had told me I needed about $15,000 in savings before I started.”
A cash flow projection could have been that person telling him that.
Don’t be afraid of the cash flow projection.
He doesn’t bite, but he can tell you things you might need to hear.
Charles Alexander is the director of the Tennessee Small Business Development Center at Vol State.