Cash and the Budding Entrepreneur

Terms like overhead absorption factor, cash flow analysis and variables costs may sound like a foreign language, but those terms all deal with cash, and understanding cash is paramount to being a successful entrepreneur. Before opening a new business you will need to determine your start-up costs and expenses.

It is wise to find out what start-up costs you will incur before starting the business. Many a budding entrepreneur takes his or her life savings, or will borrow on the equity in their home, before figuring out these financial factors, only to discover down the road, they don’t have enough money. There are many web sites and other resources to help determine costs for your business. Each item on your proposed budget sheet should be researched. Closely estimated costs can be obtained from utility companies, trade associations, shopping and networking with other business people who may have already gone through this experience. Don't start buying until your investigation shows your business venture is viable and you have all the information needed.

Your next step will be understanding financial statements. First, you need to know which financial statements are important. They are:

• Balance Sheet—shows the financial conditions of your business at a point in time

• Statement of Operations (Profit and Loss Statement)—shows whether you made a profit during a specific period of time

• Cash Flow Statement—shows what happened to your cash position during a specific period of time

You should have a basic understanding of each of these statements. When compared with statements from prior periods, you can determine whether something is happening in your business that needs your special attention. Your accountant can prepare these statements for you from the business data that you supply. There are also a number of computer software programs that will help you generate these statements from your input of regular transactions—such as sales, collections, purchases, payments and payroll.

These reports will help you understand your monthly cash flow. Your businesses cash-flow cycle may differ substantially from the income statement projections. Even if the projected income statement shows a profit, it is possible that the cash flow for the same period is actually negative. The analysis of monthly cash flow can indicate whether your business will collect sufficient cash to pay operating expenses. It will point out specific months during the year when the business may experience operating cash shortfalls and, therefore, either require additional capital or excess cash reserves for payment of expenses. It will also show when you may be able to make debt reductions and when

there is excess cash to make major purchases or expand operations. By developing a monthly cash flow projection, you can time cash needs and quantify the amount needed. The cash flow projection is an important management tool and must be developed with very realistic expectations. Sufficient cash is critical for a business to pay its expenses and to enable it to expand. If your monthly cash flow projections indicate frequent cash shortfalls, you should review the type of products and services that you offer, the mix of sales, the pricing and terms of the sale and your short-term borrowing needs.