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SBA Business Plan Webinar – Part 5 of 8


Your next step is to do the numbers of the
plan which you can do step-by-step. The math is fairly simple. The assumptions are very important, but this is doable with what you know about
your business if you just follow the steps. So you want to have a sales forecast. Typically this will be 12 months monthly, and then year two and year three annually. And it will include sales and cost of sales, also called cost of goods sold. We’ll look at that in more detail later. Personnel plan for the same times, and that, plus the sales forecast, becomes the core basis of your profit or loss. Sales less cost of sales is gross margin, then expenses, interest, and taxes are subtracted
to give you the profit. A business also needs to project it’s financial position, called the balance
sheet, which is assets, liabilities, and capital. And to do that right, you need to start that balance with an estimate of start-up costs, if you’re
planning a new company, or for an existing company, past results that
set the starting balances. All of this comes together in what is the most important component of the
business plan, the cash plan or cash flow projection, also
called pro forma cash flow. These various elements of information come together to help you project the most important resource you have, which is cash money to spend. Your financials are built on just a few key concepts that you need to know. Your profit and loss, also called income statement, takes sales and subtracts costs of sales, also called COGS, or cost of goods sold, to calculate gross margin. And from gross margin you subtract expenses, which would include interest and taxes and
your regular operating expenses, to calculate profit. The balance sheet shows the financial position
of the company at any given date. The balance includes assets, which are cash,
inventory, accounts receivable, assets like furniture, tables, vehicles; liabilities, which are basically debts, amounts you owe, for example, accounts payable, current debt, long term debt; and capital, which includes money invested
and money earned over time. Notice that the profit and loss doesn’t directly
relate to the balance sheet except through profit, which increases capital and presumably, profit will increase assets whether that’s cash in the bank or accounts
receivable. But not exactly, and not necessarily. The most important, by far, projection in
the business plan is the cash flow, which is simply money received less money
spent is money available, liquid cash. We call it cash, not referring to coins and
bills but liquidity, money in the bank that the
business can spend. The importance of the cash projection is first of all, because it’s vital to your
business survival, but also because it’s not intuitive and not
obvious. Sales, for example, aren’t necessarily money
received. They might be money called accounts receivable, where goods or services have been delivered
to customers but the business is waiting for the customers
to pay for those invoices. And costs of sales might not necessarily be
money spent. Costs of sales might come from inventory which
has been sitting in the business for months, and was purchased months ago. Expenses are not necessarily money spent either. Sometimes you receive the invoices for expenses and pay them in your business six or eight
weeks later, that happens often. This simple example highlights the importance of laying out the cash flow. We have here a hypothetical company with sales of 500 and profits of 17 and an estimated cash balance of 565, given these assumptions on sales on credit,
collection days, and payment days. Sales on credit refers to business-to-business
sales in which you deliver goods or services along
with an invoice and the customer, usually another business, pays you 30, 45, 60 days later. Collection days refers to the average waiting
period between delivering the invoice and getting
paid. And payment days refers to how long your business
waits before it pays its bills. So if we simply adjust these assumptions, and take no sales on credit meaning all our sales are in cash, and therefore no collection days. And we pay late, we can have 1163 as our cash balance instead of 565. Notice we haven’t changed sales or cost of
sales, or personnel, or expenses. We’ve simple affected the timing. Now let’s look at the worst scenario here, without changing sales, or cost of sales,
or expenses. What if we were entirely business-to-business, and we wait 90 days to get paid, and we pay our bills, now if we pay our bills
at 30 days we’re $310 missing in our cash balance. If we pay faster than 30 days, we can see
we can make this scenario look much worse, that’s a minus $768 in our balance, here again, without changing the fundamental
profitability. The solution here is working capital. If these are realistic assumptions for your
business you’re still profitable, it’s not that you
want to go out of business. You simply have to have an extra 1000 or so,
in this worst case scenario, as working capital to support the cash flow
of the business. That’s why you need to plan.

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