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2 Recap from Marketing Planning What one thing must your business have in order to be a business?

3 But wait, there’s more What OTHER thing must your business have in order to be a business?

4 Cash Flow Planning The results of your cash flow plan will help determine if your business idea is: Feasible – can you get it to be a business? Viable – can it stay in business? Desirable – will it meet the owner’s personal financial goals?

5 What is Cash Flow? Cash flow is a phrase used to describe the movement of cash in and out of a business. Cash flow specifically addresses: Timing – when cash moves in and out Amounts – how much cash moves in and out Sources – where cash comes from Uses – where cash goes Relationships – the relationships of business activity to producing or using cash Cash is the fuel for a business!

6 Cash Flow Planning Your cash flow plan will help you answer the following questions: How much money do you need to start the business? What are the sources and uses of that start-up money? How much money do you need to make monthly to cover the bills? How much money do you need to make monthly to pay yourself a salary? How many customers do you need every month in order to provide you with enough money to cover the bills and your salary? How much money do you need to save during the busy times to cover the expenses during the slower times?

7 Separate your Financial Goals Business NeedsOwner Needs Sources Investment Loans Revenue Uses Equipment Supplies & inventory Overhead expenses Owner’s draw Sources Salary from jobs Child support Self- employment income Uses Rent Car payment Groceries Utilities

8 Projecting Startup Cash Startup cash is money that must be spent in order to become a business. Activity: Work with a partner to brainstorm USES of start-up cash on your Sources and Uses of Cash

9 Cash Wants vs. Needs People have WANTS, Businesses have NEEDS Bootstrapping – keeping startup costs low and staging the risk of the business start

10 Projecting Operating Cash There are two types of Operating Cash: Cash for Goods and Services Cash for Operations

11 Projecting Operating Cash Operating cash is money that must be spent in order to keep the business going month-to-month. Activity: Work with a partner to brainstorm USES of operating cash on your Sources and Uses of Cash

12 Cash for Goods or Services Cash for Goods or Services (or COGS) are DIRECT expenses for you to produce your product or deliver your service. Name the COGS McDonald’s incurs to deliver this Big Mac extra value meal to you.

13 Projecting Cash for Goods or Services We usually start projecting cash for goods or services (COGS) by determining what it costs us to make one UNIT of whatever it is we sell. What is your unit of sale? What does it cost you to produce it (if a product) or deliver it (if a service)?

14 Projecting Cash for Operations Cash for Operations are INDIRECT expenses (overhead) that are necessary to keep the business going EVEN IF THERE AREN’T ANY SALES. Some are fixed (the same every month). Some are variable month-to-month. Some occur only once or twice annually. ** Don’t forget owner’s salary!

15 Sources of Cash In small groups, brainstorm the various sources of cash for your Start-up Expenses and your Operating Expenses. Are they different?

16 Projecting Sales Your main source of operating cash is your SALES, so part of your financial planning must include projecting your sales revenue. The amount of sales revenue you have depends on 2 things. What are they?

17 Projecting Sales Your main source of operating cash is your SALES, so part of your financial planning must include projecting your sales revenue. The amount of sales revenue you have each month depends on 2 things. What are they? 1. What price you charge per unit 2. How many units you sell each month

18 Projecting Sales How much can you sell each month? What seems reasonable? What is your capacity? What has been the experience of other similar start-up businesses in the area? What volume do established businesses in the area have? What are the industry standards? What’s your potential market size? What percent of it do you expect to capture?

19 Projecting Sales What prices should you charge? What are customers willing to pay? What do competitors charge? How does what you offer compare to what they offer? How price sensitive is the customer? What image are you going for – high-end or discount? What are your direct costs?

20 Preview Why are we doing all this? Determining your cost structure and doing the market research into price and demand will allow you to complete your CASH FLOW PROJECTIONS and BREAKEVEN ANALYSIS,to answer questions such as the following: Can I make enough revenue every month to cover my expenses without running out of money? How much “cushion” do I need to start with to cover cash flow shortfalls in the initial months of business? How many customers do I need to have every month? When can I afford to spend money on certain items and when can I not?

21 Preview: Cash flow projection How many units can I sell a month? (I think 20 a month is reasonable) What do I charge the customer for a unit? (They are $40 each) How much does it cost me to produce a unit? (It costs $20 for each one) What are my monthly operating expenses? (I have $500 a month in overhead expenses) Is it enough? No Projected revenue $800 (20 X $40) Projected COGS $400 (20 X $20) Projected Overhead $500 Projected Profit / Loss -$100 ($800 - $400 - $500)

22 Preview: Breakeven analysis Breakeven analysis calculates how many units you need to sell every month to reach break- even (no profit, but no loss). Example: Pie Bakery Outcome of cost analysis and pricing research Price per pie = $9.50 Cost to produce a pie = $3.00 Annual operating costs (including owner’s salary) $34,000

23 Preview: Breakeven analysis 1. Calculate gross profit margin per pie (GPM = (Price – cost) / Price) * Calculate annual breakeven sales volume (Annual costs / GPM) 3. Determine how many pies they need to sell per year (Annual sales / price per pie) 4. Determine how many pies they need to sell per week (Annual pies / 52 weeks) 5. Determine how many pies they need to sell per day (Weekly pies / 5 working days) 1. GPM = 68% (or 0.68) 2. Annual breakeven sales volume = $50, Annual pies sold = 5, Weekly pies sold = Daily pies sold = 21

24 Preview: Sensitivity Analysis Sensitivity Analysis is asking questions: 1.Can we really sell 21 pies per day? 2.Can we really make 21 pies per day? 3.What if there is a pie glut in the marketplace and the selling price of pies drops to $6? 4.What if we don’t sell 21 pies per day? What can we do? 5.What if we decide that making 21 pies, 5 days per week, 52 weeks per year doesn’t sound like a good time? What if… what if…what if?

25 Homework Practice using the cash flow worksheets. Practice using the cash flow worksheets. Identify your Cost of Goods (Services) Sold What are your startup costs? List all the costs for your product or service.

Planning Your Business ____________________________ ____________________________ ____________________________ ____________________________ ____________________________ ____________________________ ____________________________ ____________________________