Monday, August 20, 2012

Wenatchee SBDC Advisor offers Top Business Planning Tips


Jim Fletcher, Certified Business Advisor, Wenatchee Small Business Development CenterJuly 25, 2012

BUSINESS PLAN STEP ONE - THE BUDGET

My preference when starting a business plan is, first develop a cash flow budget.  New business,  growing business or buying a business every action requires some investment of money with the purpose of making a return on that investment.  Therefore, before writing a business plan I want to have an understanding of what financial commitment will be necessary to enable this business to be profitable and finance eligible.

Purpose of a Cash Flow Budget
Preparing a cash flow budget is to understand how money will move through the business over a period of time. Most businesses can plan on a monthly basis while other like construction or manufacturing may need to plan on a weekly basis.

Cash flow budget is to reveal the money needed to fund seasonal sales and operating cycles.  For example, a retailer may need to spend money to buy inventory several months before the inventory is received and sold.  Or, for a landscape business how much of the money earned in the summer must be saved to survive the winter?

Cash Flow helps schedule business activities such as adding labor when sale are strong.

Cash Flow identifies financing needs and structure. A line of credit for short periods, or term loans for capital equipment purchases.

Cash flow planning is all about when money goes out and when money comes in. This is not a profit & loss model, nor concerned with non cash items like depreciation

Compare your budget to actual revenues and expenses. Determine if you are reaching your goals, costs are as expected. If not you can take corrective actions to reduce planned expenses and increase sales activities.

Cash Flow Planning Tips 
  1. Divide your budget worksheet horizontally in to four sections,revenues on top, then operating expensesoverhead expenses and last financing.  
  2. Overhead expenses, are basically the same every month regardless of how much business you have. Examples, rent, insurance, utilities, office and management, loan  principal and interest payments.
  3. Operating expenses, tend to increase/decrease with the volume of business. Examples, labor, inventory, selling expenses. You may need to set up sub-worksheets for these calculations.
  4. Start filling in the numbers that you do know. Consider the frequency of these expenses are they monthly, quarterly or annually? Round expense numbers up and revenue numbers down.  Add together the overhead and operating expenses, your total expense, plus a desired profit, provides a sales goal.
  5. Adjust sales goals to reflect seasonal business. When is your business the busiest? slowest?
  6. Test the sales goal, what will it take to achieve that goal?  How many sales at an average price? What does it take, labor, inventory, supplies to make each sale? Do those costs fit within your operating expenses? 
  7. Stress test the budget again, what if you underestimated costs and over estimated sales?  Did you adjust for seasonal business cycles.
  8. Continue to refine your budget.
Section four, financing, provides a worksheet to plan your equity injections, loans or lines of credit. Also included in this work area are capital purchases of equipment, building improvements.  These are separated as one time expenses rather than ongoing operating expenses.

With a budget you are now ready to write a business plan that is focused on implementing your budget.
Jim Fletcher, Certified Business Advisor, Wenatchee Small Business Development Center