Most people don’t start a business with the goal of losing money.
Most of my clients’ dreams of entrepreneurship include dreams of making lots of money.
No, losing money isn’t really an option new business owners like to consider, but rarely does a new business generate a profit in its first year.
So an entrepreneur who is invested in his or her business for the long haul needs to have a plan in place to ensure continued operations as their business begins its growth.
Cash flow projection
One facet of a business plan is to prepare a cash flow projection using realistic projected income and expense streams to predict solvency.
The numbers on a cash flow projection are, of course, estimates. You can, however, tap into some fairly reliable resources which provide industry standards to help project sales numbers. And a list of start-up costs and a monthly expense budget will help nail down anticipated expenses.
Unlike a profit and loss statement, a cash flow projection includes all monies flowing in and out, including loans and payments to the owner, while a profit and loss statement just shows those items which have tax implications.
If the cash flowing out is greater than the cash flowing in, you need to cover the shortage by tapping resources such as personal savings, a small business loan, or loans from friends or family members.
Be realistic
A caveat to consider when preparing your cash flow projection is the point at which you need to collect a paycheck from your business.
Be as realistic as possible when preparing a cash flow projection since you will be the one to pay the consequences if your estimates aren’t reasonable. We have even known clients who opted not to start their businesses at all, once they examined their cash flow projections.
The thing I like best about a cash flow projection is you can revisit and revise a cash flow projection as the business develops. You can see where your income and expense estimates were accurate, and you can more accurately develop a cash flow projection for future periods.
A small silver lining
Most new businesses have start-up expenses such as equipment and marketing. And most new businesses require a period of time to become established. So most tend to operate at a loss for the first few years. This business loss can be a benefit as it can often be used to reduce other taxable income.
For example, if you or your spouse have wages from regular employment and your business has a $5,000 loss you can use this amount to offset your taxable wages before calculating your income tax.
read the entire article in the November edition of the South Coast Insider
