Once marketing positioning and a market niche is well understood the products or services are launched, a new business lives or dies based on cash. Just like a bad injury, a cash bleed-out can kill you.
The concept is very simple, but surprisingly this is one of the top reasons otherwise successful businesses die. Worse, it happens when success causes fast growth, just as it happens because you don't have the revenue to cover costs.
The other big surprise for most business people (and their CPA's) is that regular financial statements do not deal with cash flow. Sure if you ask for one, you will typically get a "Statement of Cash Position," which is NOT a cash flow projection even though it is related.
A cash flow forecast is a plan of when cash will come into the business (spendable money) and when you will need to pay for expenses, payroll and taxes. It involves some basic estimates about sales, payments from accounts receivable, accounts payable schedule and various other cash transactions such as loans, paybacks, tax over payments, and cash spending on new assets.
One reason most accountants don't like to do cash flow projections is that they hate to forecast. Accounting is a precise instrument of what happened. It does not naturally like estimates or forecasting.
For most business owners setting up a cash flow plan or forecast should be done by conservative planning; by themselves. Below is a basic start up cash flow plan.
1. Estimate revenue based on the last 6 months of cash receipts from sales. Use a moving average so if you are growing, this will create a trend for sales. If you have no sales experience yet, the forecast will have to come from your niche market planning assumptions.
2. Estimate average expenses for each month to be paid in that month.
2. b If you buy goods to resell, you must calculate an "Open-to-buy" plan*
3. Calculate payroll for the next several months by week
4. Add bank balance for the day you are starting the calculation.
5. Plan when you will pay for extraordinary purchases such as equipment.
Place 1. on the revenue line in a spreadsheet.
Add 4. to this number in the first column
Subtract 2, 3, and 5
This will provide a very basic cash flow plan.
Update this weekly by replacing estimates and forecasts with the real numbers.
Notice if your cash balance is trending down or up; if down, start early to make the changes to each component so you don't run out of cash. Plan to pay all bills on time, faithfully.
* An open-to-buy plan is a forecast on how much inventory you will need to keep your sales growing. Some industries like fashion retailing can require buying 10 months out, so this becomes a big issue if you miss-buy. Since few people know how to do this, many businesses over buy, which puts a huge pressure on paying bills. This results in mark-downs, whcih puts pressure on profits. More on open-to-buy in a future blog post.
We chose the name MicroGiants because small businesses are normally tiny, but they contribute in a huge way to the US economy.
Like the ant that can carry several times its weight, small businesses tend to carry much of the economy by providing about half of the new jobs, They are much more innovative and provide many new ideas and products large corporations simply miss.
We all know about Steve Jobs and Bill Gates, who both started with one or two partners. Jobs started Apple literally in a garage with Steve Wozniak.
These two small businesses (and many more) literally started the tech revolution we see today, when the behemoth, IBM completely missed the personal computer trend.
Small businesses are giants in this regard as many grow very fast due to their position in their market place, innovation and ability to be flexible while growing. These rapid growth small businesses are responsible for the majority of new hires, and fuel our entire economy.
MircoGiants is not just a fun name, it accurately describes our new small businesses, and what we hope to enable with this new approach to preparing new business entrepreneurs.