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Recap from Marketing Recap from Marketing PlanningPlanning

What one thing must your business have in

order to be a business?

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But wait, there’s But wait, there’s moremore

What OTHER thing must your business have in order to be

a business?

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Cash Flow PlanningCash Flow Planning

The results of your cash flow plan will help determine if your business idea is:

Feasible – can you get it to be a business?

Viable – can it stay in business?

Desirable – will it meet the owner’s personal financial goals?

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What is Cash Flow?What is Cash Flow?

Cash flow is a phrase used to describe the movement of cash in and out of a business. Cash flow specifically addresses:

Timing – when cash moves in and outAmounts – how much cash moves in and outSources – where cash comes fromUses – where cash goesRelationships – the relationships of business activity to producing or using cash

Cash is the fuel for a business!Cash is the fuel for a business!

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Cash Flow PlanningCash Flow Planning

Your cash flow plan will help you answer the following questions:

• How much money do you need to start the business?

• What are the sources and uses of that start-up money?

• How much money do you need to make monthly to cover the bills?

• How much money do you need to make monthly to pay yourself a salary?

• How many customers do you need every month in order to provide you with enough money to cover the bills and your salary?

• How much money do you need to save during the busy times to cover the expenses during the slower times?

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Separate your Financial Separate your Financial GoalsGoals

Business Needs Owner Needs

Sources

Investment

Loans

Revenue

Uses

Equipment

Supplies & inventory

Overhead expenses

Owner’s draw

Sources

Salary from jobs

Child support

Self-employment

income

Uses

Rent

Car payment

Groceries

Utilities

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Projecting Startup CashProjecting Startup Cash

Startup cash is money that must be spent in order to

become a business.

Activity: Work with a partner to brainstorm USES of start-up cash on your

Sources and Uses of Cash

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Cash Cash Wants vs. Wants vs.

NeedsNeedsPeople have People have WANTSWANTS,,

Businesses have Businesses have NEEDSNEEDS

Bootstrapping –

keeping startup costs low and staging the risk of the business start

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Projecting Operating Projecting Operating CashCash

There are two types of Operating Cash:

Cash for Goods and Services

Cash for Operations

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Projecting Operating Projecting Operating CashCash

Operating cash is money that must be spent in order to keep the business

going month-to-month.

Activity: Work with a partner to brainstorm USES of operating cash on your

Sources and Uses of Cash

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Cash for Goods or Cash for Goods or ServicesServices

Cash for Goods or Services (or COGS) are DIRECT expenses for you to produce your

product or deliver your service.

Name the COGS McDonald’s incurs to deliver this Big Mac extra value meal to you.

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Projecting Cash for Goods or Projecting Cash for Goods or ServicesServices

We usually start projecting cash for goods or services (COGS) by

determining what it costs us to make one UNIT of whatever it is we sell.

What is your unit of sale?

What does it cost you to produce it (if a product) or deliver it (if a

service)?

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Projecting Cash for Projecting Cash for OperationsOperations

Cash for Operations are INDIRECT expenses (overhead) that are necessary to keep the business going EVEN IF THERE AREN’T

ANY SALES.

Some are fixed (the same every month).

Some are variable month-to-month.

Some occur only once or twice annually.

** Don’t forget owner’s salary!

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Sources of CashSources of Cash

In small groups, brainstorm the various sources of cash for your

Start-up Expenses and your Operating Expenses.

Are they different?

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Projecting SalesProjecting Sales

Your main source of operating cash is your SALES, so part of your financial planning

must include projecting your sales revenue.

The amount of sales revenue you have depends on 2 things. What are they?

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Projecting SalesProjecting Sales

Your main source of operating cash is your SALES, so part of your financial planning

must include projecting your sales revenue.

The amount of sales revenue you have each

month depends on 2 things. What are they?

1. What price you charge per unit

2. How many units you sell each month

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Projecting SalesProjecting Sales

How much can you sell each month?• What seems reasonable?

• What is your capacity?

• What has been the experience of other similar start-up businesses in the area?

• What volume do established businesses in the area have?

• What are the industry standards?

• What’s your potential market size? What percent of it do you expect to capture?

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Projecting SalesProjecting Sales

What prices should you charge?

• What are customers willing to pay?

• What do competitors charge? How does what you offer compare to what they offer?

• How price sensitive is the customer?

• What image are you going for – high-end or discount?

• What are your direct costs?

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PreviewPreview

Why are we doing all this?

Determining your cost structure and doing the market research into price and demand will allow you to complete your CASH FLOW PROJECTIONS and BREAKEVEN ANALYSIS,to answer questions such as the following:

• Can I make enough revenue every month to cover my expenses without running out of money?

• How much “cushion” do I need to start with to cover cash flow shortfalls in the initial months of business?

• How many customers do I need to have every month?

• When can I afford to spend money on certain items and when can I not?

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Preview: Cash flow Preview: Cash flow projectionprojection

How many units can I sell a month?

(I think 20 a month is reasonable)

What do I charge the customer for a unit?

(They are $40 each)

How much does it cost me to produce a unit?

(It costs $20 for each one)

What are my monthly operating expenses?

(I have $500 a month in overhead expenses)

Is it enough?No

Projected revenue $800 (20 X $40)

Projected COGS $400(20 X $20)

Projected Overhead $500

Projected Profit / Loss -$100

($800 - $400 - $500)

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Preview: Breakeven analysisPreview: Breakeven analysis

Breakeven analysis calculates how many units you need to sell every month to reach break-

even (no profit, but no loss).

Example: Pie Bakery

Outcome of cost analysis and pricing research

Price per pie = $9.50

Cost to produce a pie = $3.00

Annual operating costs (including owner’s salary) $34,000

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Preview: Breakeven analysisPreview: Breakeven analysis

1. Calculate gross profit margin per pie (GPM = (Price – cost) / Price) * 100

2. Calculate annual breakeven sales volume(Annual costs / GPM)

3. Determine how many pies they need to sell per year(Annual sales / price per pie)

4. Determine how many pies they need to sell per week(Annual pies / 52 weeks)

5. Determine how many pies they need to sell per day(Weekly pies / 5 working days)

1. GPM = 68% (or 0.68)

2. Annual breakeven sales volume = $50,000

3. Annual pies sold = 5,264

4. Weekly pies sold = 102

5. Daily pies sold = 21

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Preview: Sensitivity AnalysisPreview: Sensitivity Analysis

Sensitivity Analysis is asking Sensitivity Analysis is asking questions:questions:

1. Can we really sell 21 pies per day?2. Can we really make 21 pies per day?3. What if there is a pie glut in the marketplace and the

selling price of pies drops to $6?4. What if we don’t sell 21 pies per day?

What can we do?5. What if we decide that making 21 pies, 5 days per

week, 52 weeks per year doesn’t sound like a good time?

What if… what if…what if?What if… what if…what if?

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HomeworkHomework

• Practice using the cash flow Practice using the cash flow worksheets.worksheets.

• Identify your Cost of Goods (Services) Sold

• What are your startup costs? List all the costs for your product or service.

Planning Your Business

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