Over the past two weeks we have created a Financial Plan for a new business. At this point, you should be happy with the outcome out in the future. Remember our goal here is to create a Future.
If you have done a credible job, you are going to find that a new business is not instantaneously profitable. That means that we need some funds to close the gap. There are two challenges here. The first is to discover the magnitude of the gap and second to actually cover the gap.
To start on the first point, the best way to go is to create a "Cumulative Cash Flow". This is a summation of all the profit and loss of a business over time. So if we go back to our Spreadsheet, there should be a Net Margin at the bottom of the chart for each month. If you sum the Net Margin for each month with the sum of all the previous months, you get Cumulative Cash Flow. Additionally, there may be some pre-operating expenses. This would include items like Company Formation Legal Costs, Site Acquisition, Website Development and similar expenses. Most of these are one time costs, some of which may have monthly fees to go along with them.
If you look across this line of Cash we have just created, you will note that the number goes more and more negative until you have positive Net Margin. The most negative number is the worst number that you end up with in forming your business. This is (according to your plan) the minimum amount of money that you have to Finance to start your business. It is this number that causes many small businesses to have challenges before they get very far.
Once you are out of cash, you are out of Business. So as you are starting your business, you need to provide that cash ahead of time - or Fund Your Business. We will talk about sources and challenges on that front next
week. But I want to add a note of caution here. You are probably optimistic about how fast you can build your business. So plan for your business to get a lot worse off than your business plan. Think about having around 2x the cash that you have required in your plan.
To sum up:
- Create your Cumulative Cash Flow
- Find the nadir of your Business from a cash standpoint
- Plan for things to be worse than that
Next week we will talk about funding sources!
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