NCET Biz Tips: How to Start a Business: Part 9 – Financial Projections
by Marie Gibson
Marie Gibson
Each previous article in this series provided the groundwork for this MONEY conversation. And, yes…that’s exactly what financial projections are! What is your budget for this business? What does the item or service cost to make? To sell? To deliver to the customer? What will you earn on each sale?
Once you’ve created your general business plan, you can then start attaching dollars to your planning decisions. We’d like to have a solid understanding of our business plan so that we can estimate startup costs, know how to project (budget) the revenues associated with the expenses of running the business, and know how much money we’ll need to start the business. This will help you decide if you already have enough money to start your business or if you’ll need to find financing.
The first step is to create an initial budget called Start-up Expenses. This includes a list of the equipment that you need; the initial costs, your deposits for buildings, leases, any initial licenses, and professional and marketing fees that are one-time expenses needed to create your business. What exactly do those look like? How much money will you need up-front to start?
The next budget is for your operation expenses. Once you can create the business, how much will you need to keep it running each month—even if you have zero sales? Estimate how much will your utilities be. Your rent? Your insurance? Your equipment rental, storage? These will probably be the same or fixed amounts for each month.
Then, when you start making the item, or selling the item, there will be additional costs. This will be the third portion of your budgeting process. The more you make, or the more you sell, the higher those costs become. Those might be called cost of goods sold, or cost of services sold. These can be a little more difficult to budget; however, let’s assume for the sake of this example, that I’m opening a retail store and I buy something for $1 and sell it for $2. The more I sell, then the higher my costs will be. If I sell $1,000, then my costs are $500; if I sell $4,000, then my costs are $2,000.
These revenue projections and costs add a layer of complexity to your budgeting process and spreadsheet software helps with these calculations. You can use general guidelines and create a sales budget indicating that you will sell $15,000 per month; with costs of goods or services of $7,500; leaving you with $7,500 to pay your other fixed expenses, your loans, yourself, and to re-invest in the business.
Now, how will you sell that “projected” $15,000? That’s an average of $500 per day each for 30 days. Will you have walk-in traffic? Will you have online volume? Will you find companies to promote your goods and services—for instance, a broker? This question leads right back to the substance of your business plan.
As you work through your projections, make sure that you include extra money for yourself, for profit! If you’re going to lose money, figure out how to fix it before you open your business. If you’re unable to make your plans earn a profit on paper, then it will be even harder in real life. We want to make sure that we reward ourselves for our risk, our efforts, our ideas, our ingenuity…making sure that the outcome rewards the effort! Too many business owners fail not due to a lack of a good idea, but because their reserves and budgeting for cash is lacking.
In next month’s column, we’ll take your budget information and use it to create a sources and uses of funds statement that looks at how much money you’re going to need, when you’re going to need it, where you’re going to get it, and where you’re going to spend it. See you next month!
Marie Gibson, Management Consultant, Gibson & Associates, LLC, helps business owners create, fine-tune, and actually use their accounting systems to make decisions with certainty in uncertain times!
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