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Financial planning: Introduction

You've dreamed about it, talked about it, maybe even dabbled in it part time, but finally you've decided to do it. Start your own business. The first

step is to think it through. Seriously. Before you dive in full time, you need to be certain: Is the money there? Are you the right person? Is it the right idea? Is it the right time? Are you ready? Sogo to the next slide !


The right time to ask yourself the tough questions is before you start the business, not when you're already in it up to your knees. The following questions are designed to stimulate thought. There are no right answers here. Why do you want to do this? Freedom? Control? Money? To combat boredom?


What kind of personality do you have?

Are you a leader? Only self-starters need apply for small

business ownership. Are you a decision-maker? Being in business means making decisions, sometimes rapidly and usually on your own. Are you competitive? Keep up or get left behind ... you will have to know what the others in your field are doing. Are you compatible? You'll be in almost daily contact with customers, vendors, professional and legal people. It's important to be able to get along. Are you a planner? There is a lot to organize when starting up and running a business, from inventory to staff to choice of letterhead. 10/12/2011

What kind of condition are you in physically, emotionally and financially?

Running a business may require working long days and weekends. Check your endurance level.

Burnout happens easily when you're making all the decisions. Check your motivation level.
Starting a small business means making sacrifices

in standard of living and personal time. Check your family's adaptability.


Financial planning: The competition

Is there a market for your business? Will there be

customers, or is the area already saturated? When considering competition, you have to look at it at all levels, not just the obvious rivals. For example, if you plan to open a discount shoe store, you would look at other shoe stores. But how many full-product-line discount centers nearby also sell shoes? Make sure you are aware of all the choices the consumer has of places to purchase a product similar to yours. Telephone books, Chamber of Commerce listings, business development centers and even real estate brokerages are great places to start your search on local competitors.
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Who are your target consumers?

You'll have to determine the demographics and lifestyles of

your buyers if you want to attract and keep them. Secondary research -- the type found in other people's studies -- is easily located in industry surveys, in trade association publications in your library reference section or from census reports. You can also conduct your primary research by going right to the buyer for answers. Conducting street surveys, or gathering focus groups, of your target audience should net you firsthand knowledge of consumer acceptance of your product, price and design. You can continue this type of research when the business is under way to keep up with buyer demands. Don't be afraid to approach competing businesses with your questions; they have time and experience on their side.
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Financial planning: How much money do you need?

Cash. Capital. Funding. Whatever you choose to call it,

starting a business takes more than talent and hard work. It takes money. Of course, to be a successful business owner, you need a dose of the following:
A knowledge of the business

Luck (it never hurts)


But without sufficient money, you're back to dreams.

Don't get lost in the visions of fortune and freedom before you ground yourself in the reality of making it work. Most small businesses are undercapitalized right from the start, according to the experts. Without budgets and a simple cash flow statement, you risk condemning your business to failure because of lack of money. Enter your project prepared for the financial challenges, and you'll stand a much greater chance of thriving.


In order to ensure a profit for your business, you have

to think ahead in terms of expenses and income. By preparing a budget as your "profit plan," you map out projected incomes and outflows for your company. Some experts recommend preparing a master budget for the entire year, then breaking it down into manageable sections, such as quarters or months. To determine the capital costs portion of your budget for the first year of business, you'll have to start by totaling what you have on hand, what you'll need to open up shop and what you'll need to operate for the first quarter.



Financial planning: How much money do you have?

More than 75 percent of small-business owners self-

finance their company startup, according to the Small Business Administration. So before you launch a new enterprise, examine your resources -- not only those you will put into the business, but also those In other words, how much capital can you count on? First you will have to prepare a personal financial statement that describes your assets and liabilities. This financial statement will eventually become part of your loan proposal package, so make sure the entries are accurate. that will keep your household afloat. 10/12/2011 11

Financial planning: Thinking it through

Personal Finance Worksheet Liabilities

Savings: Stocks and bonds: Real estate: Life insurance: Vehicles: Other liquid assets: Total: Net worth (assets minus liabilities):

Credit card debts:

Auto loans: Real estate loans: Insurance payments: Taxes: Other liabilities:



Financial planning: Family budget

You'll need to add up what the family will require to make

it through. You have to examine the saving and spending habits of your family to do this. The best way to understand your family's personal cash flow needs is to create budget. If you already have a budget, look back over the past year's expenses. If you don't have one, try to recreate what the family spent last year, at least in the major categories like loan payments, food, utilities and entertainment. Since many of the expenses are variable, identify which can be cut back, and which can be cut out.



Family Budget Worksheet Husband's net income Wife's net income Income Dividends and interest Other Total: Auto payment Fixed Insurance Mortgage or rent Taxes Child care Clothing Entertainment Expenses Food Gas Gifts Flexible

Home repairs Telephone

Utilities Vacations Other Total:



Remember, too, that at least one partner's income will

change, maybe for the worse, for the first few years of business startup and growth, so you will have to write your new budget to reflect the loss of income, or change in income. If the budding entrepreneur is the sole breadwinner, you'll have to plan on a larger loss of income. Put at least one-fourth of the family's annual expenses in a bank account before you open your business. Financial planners always recommend an additional three-month liquid emergency fund, such as a money market account or short-term certificate of deposit. You may want to increase that to six months to cover the family during startup Use these figures to create a one- to three-year family survival plan in case the business does not generate the expected revenues.
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Financial planning: Calculating business costs

The family expenses have been calculated, now what

about the business? Startup necessities will vary depending on the type of business. To open the doors of a new construction company you need heavy equipment, while a boutique needs clothing inventory. Once again, you must create financial statements. This time they break out what it will cost to open the doors, and what it will cost to keep the business operating. Most of the numbers you need can be found by calling vendors, suppliers, and professional and government offices.
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Some items to consider in startup are the physical property and its condition, inventory, legal fees, supplies and services, and insurance. You'll also

need to include advertising costs, because if the public doesn't know you're in business, you won't be. A basic startup worksheet would look like this:
Advertising Equipment Insurance Legal fees Licenses Remodeling Rent Supplies Utilities Other Total:
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Once the doors are open, you have to be able to keep them open, so you need to know your operating costs. The Small Business

Administration recommends that you be prepared for three months of operating costs, without relying much on income from the new company. A basic operating worksheet would include the following: Advertising
Cost of living Insurance

Rent Supplies Taxes Wages



If you total up three months worth of operating costs

(you should already have the cost of living portion, if you calculated the family budget) you have a good idea of what you need to go into business. The operating cost statement, coupled with the net worth statement, will tell how much you can personally afford, and how much you'll need to finance.



Financial planning: When will you break even?

To stay in business, you have to make a profit. So how

many widgets do you need to sell to start making money? You'll know the answer when you calculate your break-even point. It's an important concept to learn before you get started, because below the breakeven point you generate losses, above that point it's profits. How do you figure it out? It's fairly simple. The break-even point is where sales cover costs. Here's the formula in units: Total fixed costs divided by (Price per unit minus Variable costs per unit) equals sales at the break even point.
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For example, you calculated that your sunglasses


manufacturing plant has fixed overhead expenses of $7,000 a year. That covers items such as the rent, electric bill and payroll. To make, advertise and mail the sunglasses costs $4.50 a pair. That is your variable cost. You think you can easily sell the sunglasses for $12 each, based on your industry research. So: $7,000 divided by ($12 minus $4.50) = 933 You would have to sell 933 pairs of sunglasses to break even. In dollars, you can calculate the sales volume needed to reach the break-even point by multiplying the number of sunglasses you need to sell by the selling price: 933 x $12 = $11,196


Break-even analysis can show you profit levels of sales

and help you determine the success of your project before you start. However, it does not help you to examine cash flow, the actual movement of cash in and out of business. Getting a handle on cash flow is essential to maintaining financial control.



Financial planning: Figuring cash flow

While your worksheets help you build a budget for the

future, you will need to check periodically on the immediate financial health of your company. Cash flow analysis can help you do that. A projected cash flow statement estimates what the flow of money will be like in the coming months or years based on a history of sales and expenses. A monthly cash flow statement reveals the current state of affairs. A cash flow budget is your core tool in maintaining control over company finances. While you can almost always cut back on costs, or the cash going out, you can't always generate sales, or income. So you need to know where the money is, and where it's going.
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The basic elements of cash flow are:

Starting cash, or starting balance -- What you have on

hand at the beginning of the month. Cash in -- All cash received during the month, including sales, paid receivables, interest or cash from sales of assets or stock. Cash out -- All fixed and variable expenses Ending cash, or ending balance -- Add Starting Cash to Cash In for total cash, then subtract Cash Out.



Here is an example of how you measure cash flow by

subtracting your monthly ending balance from your starting balance. Let's say you started the month with $3,500. You brought in $1,000 in sales and you paid out $400 in rent and $600 in wages for a total of $1,000 in expenses. So your ending balance is still $3,500. While you did show some sales, your monthly cash flow would be $0. To survive in business, you want positive cash flow, which means you are taking more in than you are spending. Positive cash flow gives you forward motion to build and grow.
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Even a small lag in sales can make a dramatic impact

on cash flow, but you might not know that without your cash flow budget. At the end of every month, compare your actual business sales with your estimated cash flow projections. If they are out of whack, consider the cause. Maybe you didn't factor in the need to hire summer vacation replacement help or the jump in paper prices for your printing business inventory. Cut back on the outflow where you can, and adjust monthly cash flow projections to more realistically meet your needs.



Top Ten Financial Planning Tips for New Businesses

With many small businesses currently stuggling as the

global credit crunch really begins to bite, now is a particularly apt time to make sure that your companys finances are in order. Safir Senduk & Partners for Business Solutions offers their top ten tips that all small firms should adopt to keep their heads above water.




Make financial reports your best friend Don't be afraid of financial reports. Basic reports such as your profit & loss account, sales forecast and cashflow analysis, should be your best friend - putting you in control of your business finances. Get to grips with it early on - you do need a clear idea of the level of sales you expect to achieve and your costs.


Always Budget Budgeting is the most effective way to manage your business' cashflow, and allows you to take advantage of any new business opportunities. Always have a contingency fund and, most importantly, be realistic.


Monitor your finances regularly

The best financial reports in the world are useless if you don't review them regularly. Take time to monitor your finances at least monthly. This will allow you to identify any potential problems in advance and take steps to avoid bigger problems later.


Cash is king Never underestimate how much cash you need. Many businesses fail because they don't have enough cash, not because they are unprofitable. Review cashflow regularly, and carefully balance any credit given to customers with the terms of your suppliers. Don't be afraid to negotiate with suppliers.


Manage Risk


Going into business is risky enough - avoid unnecessary risks, for example, by using insurance wisely to avoid unexpected costs.


6. Don't forget your most valuable asset Many businesses fail to think about what they would do if a key member of staff was suddenly unable to work. Think about using insurance where possible to mitigate these risks. 7. Protect your share of the business If you are a partner or a company director protect your business in the event of a partner or a codirector becoming ill or dying. Life assurance, for instance, is historically cheap. On the death of a partner or co-director it can be set up to i) provide funds to purchase shares or repay capital accounts and ii) give bereaved families a fair share of the business.

8. Maximise the returns from your bank account

Many businesses need a reasonable amount of cash in the bank, not least for their tax liabilities. Make your money work for you by always getting a competitive rate of interest. But don't leave too much money in your current account - most banks allow you to transfer funds quickly between current and deposit accounts allowing you to earn as much interest as possible. 9. Consider all your funding options If you need to borrow money to get the business started always consider all your options and check whether there is any financial assistance available, such as grants. Don't blindly accept the first offer you receive. Always read the small print and get advice if you are not sure. 10. Get Professional advice where appropriate

Don't avoid professional advice because you think its going to be expensive. Good advice often more than not pays for itself.
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The truth may hurt, but financial projections should be brutally honest Every small-business owner asks these questions:

How many employees should I add? Or cut? Where should I keep costs so I can get the profit margin I want? Will I need to find more capital? Are my revenues going to grow fast enough for me to gain market share?

The answer to every one of them is found in one document -- the financial projection.

Honesty should be the policy All major business decisions flow from the forecast, which looks ahead several years -- three to five is usual -- and projects sales, costs and other key numbers that affect a business owner's bottom line. To be useful, a financial forecast should be an honest, no-holds-barred projection. Unfortunately, many are no more accurate than a magic 8-ball.



Cash forecasts
These break down the budget and 12-month forecast into even further

detail. The focus is on cash flow, rather than accounting profit, and periods may be as short as a week in order to capture fluctuations within a month. All projections should be broken out by months for at least one year. If you choose to include additional years, they generally do not need to be any more detailed than by quarters for another year and then annually after that. The projections should include an income statement and a balance sheet. Expenses can be summarized by department or major expense category; you can hold line-item detail for the budget. Cash needs should be clearly identified, possibly by adding a separate statement of cash flows. If your financial statements usually report financial rations or expenses as a percent of sales, calculate and report these as part of the projections, too.