Basic Business Cents
Homework for Starting a Business
Part II-Do the Financial Numbers Make Sense?
by Lou Schultz, SCORE counselor
Original publish date 08/2010 (#42)
Don (Dominick) Shrello used to teach a seminar on opportunity analysis in which he listed decision factors under “Is it Real?”, “Can We Win?”, and “Is It Worth It?” In the last article we focused on Part I, Is Your Business Idea a Good One?, of our six-part series on doing proper homework before starting a new business. In this article we will focus on the financial aspects, Is It Worth It?
Experienced people with business or financial background may wish to use software to create their financial analysis but I believe there are a number of questions to be answered before you rely on software. Remember that old computer axiom, garbage in, garbage out!
I suggest you start with a simple spreadsheet, either manually or on a computer. List by month for the first year and quarterly for the next two years your forecasted revenue by major income streams. Show when the money actually comes in and not when the sale is made if there is a lag in accounts receivable.
Then under that, list your major expenses for the same time periods. Be sure to include all forecasted costs including inventory, start-up costs, operating expenses, your personal financial requirements, employee compensation, benefits, taxes, cost of sales, insurance, training, consulting, advertising & promotion, maintenance, warranty, utilities, travel, and the all-important “other”.
By subtracting the total expenses from the total revenue, you get your net gain or loss for that period. Add another line and calculate your accumulated gain or loss from the beginning. Because of inventory, facilities, and other start-up costs, expect to go negative for some time. The peak accumulated-loss will show you how much money you need to start your business. The cross-over point where the accumulated gain or loss turns positive will show how long it will take you to break even. This is a good time to double check to ensure your projections are realistic and conservative. From this data you will be able to get a feel if this business is feasible and if you have the staying power. You may wish to make some adjustments in your planning at this time. A word of advice, keep a list of all the assumptions you have made because when you come back and analyze your projections and compare with actual data, you may not remember why you made certain forecasts. It is always good to be able to check your assumptions and make corrections.
By doing this rudimentary analysis, you have a good feel for the financial view of the business and you are ready to take advantage of computer programs like Quick Books to do more formal analysis with an Income Statement, Balance Sheet, Cash Flow Statement, and Break Even Analysis. If you need to borrow money to get you through to where the profits from the business are sustainable, you will find these statements necessary.
Additional help is available by going to www.score.org and clicking on Business Tools where you will find financial templates, on-line workshops, and resource links. SCORE is a national non-profit organization of volunteers who provide assistance to entrepreneurs at no cost. They can be reached locally at 218-732-2259.