Often business owners skeptically view a business counselor’s advice about cash budgeting. Their argument is that cash flow for a small start-up or existing small businesses is uncertain, sporadic and unpredictable.
True — no matter how much time and effort you spend on projections, there is a limit to how reliable they can be as a financial roadmap. Moreover, in some cases as you look back, the actual financial statements don’t even come close to your estimates. So, why waste time on a futile exercise?
Instead of viewing financial projections as a prediction they should be regarded as an exploration of the range of possibilities based on certain assumptions. You can look at different scenarios, including your best-case and worst-case situations.
Number crunching is valuable because the business owner/manager gets to understand the dynamics of how different elements of the total financial picture are interrelated and to learn what effect changes in some variables can cause. In other words, you can conduct sensitivity analysis. Consider the following: What effect does a few-percentage-point-change in gross margin do to your bottom line? How does a few days’ difference in accounts receivable influence your cash balance?
All financial assumptions can be divided into revenue assumptions and cost assumptions.
Revenues can be estimated directly (top-down method) or indirectly (bottom-up method). For example, a direct way for a restaurant to estimate revenues would be to estimate the expected number of customers per lunch and dinner, then multiply these with the average check per meal to arrive at weekly or monthly projected sales figures. An indirect way would be to estimate all expenses first and then to find the break-even point, which is the sales level needed to cover all expenses.
When estimating costs, first categorize these as investments in long-term assets, expenses, deposits, working capital, pre-paid items, etc. Expenses can be further categorized into one-time start-up expenses (e.g., pre-opening advertising expenses, incorporation fees) and regular monthly operating expenses. You need to start with most certain and regular expenses then move to the ones where more guesswork is needed.
A financial projections spreadsheet tool (Excel spreadsheet) is available. One of the advantages of this spreadsheet is that it is fully integrated, including loan amortization schedules and depreciation. This tool allows Missouri Small Business & Technology Development Centers (MO SBTDC) counselors to significantly reduce time spent on dealing with the technical aspects of creating financial projections. In addition, many convenient formatting options are included.
MO SBTDC business development specialists offer a variety of tools and services to assist those wanting to start or grow a business. Find a center near you.– Tool and article provided by Aldis Jakubovskis, former MO SBTDC, St. Louis business specialist
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