September 29, 2022

Unitranche

Supportive Business Potential

Do a cash flow before starting a business | Community

“That’s just the way God made me. It’s not my fault.”

You’d think I was talking to someone about a mental illness.

“Can you do it for me? I mean, I’m great at the visionary side of things, but I’m just not a numbers person. And you know you always say to delegate things (awkward giggle).”

I was talking to a client that wanted to take their side hustle to a full-time business.

This person wasn’t an artist that couldn’t grasp the formality of digits. It was someone that made a 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 this really necessary? I have faith in myself and a cash flow projection is just guessing anyways. I really feel it would almost be unethical to complete one since the numbers aren’t even real yet.”

Yep. He went full 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, it was for himself, but still unethical.

For years now I have coached businesses that either want to get started or grow.

That usually means we are usually discussing marketing, cash flow analysis, or getting some capital infusion.

The startups are the most fun and also the most infuriating.

They are so excited and full of optimism, yet also scared of their own shadow all at the same time.

One of the first things I have them do is to complete a cash flow projection.

It is 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 ever be financially successful in real life?

Not to mention that it forces you to confront how much money you need to get started and how much you need for working capital.

This would be like planning out an elaborate vacation, but not looking at your bank account to see if you had the money to do it.

Sure, you could plan a week-long resort stay in Cancun, complete with excursions, however, you would surely make sure that the cash was available before you booked your flight, correct?

Yet I see folks do this all of the time when starting a business and it’s one of the things that successful business owners always tell me they did first or wish they did first.

Let’s make sure you start off on the right foot.

Below are the questions you need to answer to complete your cash flow projection.

How much cash do you currently have?

Real dollars that is — not, I think I could get my cousin Frank to lend me a few bucks.

What are the start-up costs?

What items do you need to launch the business and how much do they cost?

How much working capital do you have available?

After you subtract the startup costs from the cash you have, whatever is left over is your working capital. Think of it like a piggy bank that you can use to pay the bills, until you have enough money from the business to pay the bills.

What are the monthly fixed expenses?

These are the expenses that have to be paid, whether you make any money or not. For example, insurance, marketing, payroll, rent, etc.

What are the projected sales?

There are a few ways to project sales and they are all more art than science.

If this is a current side hustle, look at the amount of money you make now and how many hours you put into the business and take it from there.

If you are currently putting 20 hours in a week and making $2,000 with it, then you are making $100/hour. Multiply that by the number of hours you are spending at your full-time job and that’s the ballpark of what you can expect to make in year one.

What are the costs of goods sold (COGS)?

These are variable costs and are tied to sales.

For example, if you are a woodworking business and you sell a table for $1,000 and the materials cost you about $250 then that is 25% COGS. A lot of service-based businesses COGS would be the payroll of providing that service.

You are taking your catering side hustle to a full-time business.

$20,000 (you’ve been saving your net profit)

$15,000 (laptop, updated equipment, inventory)

$5,000 (startup capital minus startup expenses)

This means you have a piggy bank of five grand to help you pay the bills while your business grows.

$3,000 — Insurance, payroll, marketing, admin costs, etc.

Average sale = $1,000/event

Your first full month you project just four events, since you are still making a name for yourself

30% (food, materials, etc.)

In this case, $4,000 x 30% = $1,200 COGS

Minus $4,000 Fixed Expenses

Equals = Negative $200 in month one.

Since you have $5,000 in working capital, that means you still have $4,800 in the bank.

If you don’t have additional income, like a spouse with a full-time job, then this $4,800 will need to be available for personal living expenses.

Your goal will be to grow your number of sales each month, while keeping your fixed costs steady and keeping a close eye on COGS too.

The guy with the consulting business never did a cash flow projection.

It was a rough start, but he did turn it around and is doing well now.

I asked him recently if he would’ve done anything differently.

He said, “Yeah, I wish someone would’ve told me that I needed around $15,000 saved, before I ever started.”

A cash flow projection may have been that person that would’ve told him that.

Don’t be afraid of cash flow projection.

It doesn’t bite, but it can tell you things you may need to hear.

Charles Alexander is the director of the Tennessee Small Business Development Center at Vol State.