Finance: Go With the Flow to Check for Business Success
by Michael Noel | November 20, 2018
Sometimes things just fall into place and all you have to do is go with the flow. Unless the flow is heading in the wrong direction! One of the main reasons new businesses fail is that they run out of cash before they have a chance to succeed.
So perhaps you’re ready to start your own business, but where do you start? Of course, checking to see how many people are interested in buying your product or using your service is a good sanity check, but before you get very far into the fun part – you need to run the numbers. How will cash flow through your business?
You may start with a shopping list for everything you need to open the business:
- Starting inventory or materials
- Equipment, furniture
- Deposits on utilities
- Licenses & permits
- Insurance
- Office supplies
These are the start-up costs that happen before the doors open. Do you have enough money so far? Okay then, next.
Your second list will be the recurring expenses:
- Rent
- Payroll
- Advertising
- Utilities
These happen every month, whether you have sales or not – they are consistent or fixed expenses. You can estimate most of the numbers by making some calls, getting some quotes, or doing some research.
And now the trickiest part, estimating sales.
Industry research can provide benchmarks for similar businesses in specific areas of different sizes, or they can be compared to complimentary businesses. Sometimes these numbers are steady and sometimes they ebb and flow with seasons. At some point, using your best educated reasoning (I don’t like to say guess), you can project your sales over 12, 24, 36 or more months toward what you believe is your capacity given the size of your store, factory or labor force – until you decide to expand (new numbers!).
This process of cash-flow projection will create a month-by-month estimate of how many months your expenses will exceed your revenue (negative cash flow), until the revenue equals your expenses (break-even), and the glorious day when your revenue exceeds all costs and you make a profit (profit!).
The cumulative total of those negative cash flows and that start-up shopping list will tell you the minimum amount of cash you will need to get your business started. If you have or can raise the needed capital – it’s on to the rest of your plan.
Most people are nervous about starting or expanding a new business because they feel that they are taking a risk. Well, they are, but the best way to minimize risk and to have confidence moving ahead is to test it out on paper first with a well thought out cash flow analysis.
So, it may not seem like the most fun, but go with the flow and make sure your business will have enough cash to achieve your dreams.
