NEW BUSINESS START-UP CASH FLOW PROJECTIONS
As you will soon discover, CASH IS KING. Your should want to know that your business will cash flow before you start the business. You can bet your banker will want to know, so it is best to do a preliminary cash flow spread sheet just to make sure.
I am often asked, “How can you possibly know if the business will cash flow or not, before you open the doors? How can you be sure customers will actually shop with me?” And these are very good questions. My answer is that we must realize the numbers used in the cash flow projections are based on certain information discovered in the feasibility study. How big is the market? Who is the competition? What is the gap, meaning the difference between the market size in dollars and the amount of business your competition is doing and how much of the business gap is being lost to markets outside your home market? In addition, owner injection will determine the maximum size loan available for investment in the business. Other considerations are current market sales per square foot of occupancy. This should help in determining the size of location needed. Also, you must consider the type business your are wanting to start; retail, franchise, wholesale, service, distribution, professional, etc. This will help determine the type location needed and where best to locate the desired business.
For this purpose let’s assume that your category of business (nationally) averages about $235.00 of revenue per square foot of selling area. Also, let’s assume for the purpose of this analysis that average annual rent per square foot is $12.00. Space required = $1,200,000/235.00=5,106 sq. ft. X $12.00 per sq. ft.=$61,272./12= $5,106 per month or 5.11% of sales. You should never pay more than 6% of total sales in rent, with rent as a percent decreasing as sales increase.
Let’s also assume that you and your partners will inject $270,000 into the start-up and that your total project investment will is $900,000.-$270,000 = $630,000 Loan Amount.
Total Market Size in Dollars = $20,000,000.
Competition Sales = -15,000,000.
Market Gap = $ 5,000,000.
Capture 5% of Market= 1,000,000.
Potential Market Avail. $ 6,000,000.
(First year sales projected at 20% of available market, with 10% sales increase each year after for a total of 29.3% market share at end of first 5 yrs.)
Start-up Capital= $ 900,000.
Opening Inventory = -400,000.
Furniture & Fixtures= -50,000.
Beginning Misc. Expenses= -50,000.
Beginning Cash on Hand= $ 400,000. – $ 388,000. – $ 480,400. – $ 582,040. – $ 693,844.
Projection Revenue Yr. 1= $ 1,200,000. Yr. 2 = $1,320,000. Yr. 3 = $1,452,000. yr. 4 = $1,597,200. Yr. 5 = $1,756,920.
Cost of Goods Sold = 720,000. 792,000. 871,200. 958,320. 1,054,152.
Gross Profit From Oper.= $480,000. $ 528,000. $ 580,800. $ 638,880. $ 702,768.
Projected Operating Exp.= 492,000. 435,600. 479,160. 527,076. 597,784.
NET PROFIT FROM OPERS. $ (12,000.) $ 92,400. $ 101,640. $ 111,804. $ 104,984.
Ending Cash Balance $ 388,000. $ 480,400. $ 582,040. $ 693,844. $ 798,828.
(All projected numbers should be based on conservative operating revenue and slightly exaggerated expenses. The numbers above are based on 60% cost of goods, 33% operating expenses and a net profit of 7% except for the first year. Breakeven is projected the second year. All numbers are hypothetical and are not based on a real business or a business plan. (Actual cash projection is a bit more detailed than shown above These numbers are meant as an example of the thought process involved in determining projected cash flow. In addition, add backs, such as: taxes, depreciation, amortization, owner’s misc. income (auto, insurance, non-working family members income, personal travel), Interest charges, bank charges, bad debts. etc., give a truer picture of actual cash flow that the business has generated through operations.
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