Monday, May 25, 2015

Writing a Small Business Plan - The Importance of Cash

The saying that "cash is king" is never more true than for a small business owner. While large businesses may sit on huge reserves of cash and not be worried about borrowing when it runs low, a small business has to worry. A business plan for a small business should address these cash concerns.
Startup Cash

A primary reason to create a business plan is to be able to raise capital. Before doing so, the small business entrepreneur must know how much cash will be required to launch. The startup cash needs are determined by this equation: total payments needed before launch + shortfall between cash inflows for operations and cash outflows for expenses until break-even + a cash reserve. Entrepreneurs will often forget one of the last two numbers, raising only enough to cover the expenses prior to launch and forgetting that additional cash must be on hand to carry the business through its early months (or years) before it generates its own cash through operations. It can be very difficult to go back to funders for more money just as the company is ready to launch. Funding may not be forthcoming, or may be available only at punishing interest rates. Think ahead to plan for the full startup cash requirements so that the first round of funding can hopefully be your last.
Cash Planning
The business plan requires the entrepreneur to create a cash flow statement which should then act as a guide for ongoing cash management. By looking ahead to see the month by month (or even week by week) cash inflows and outflows, the entrepreneur can see cash flow problems and plan for how to solve them before they occur. Remember that the meaning of bankruptcy is the inability to pay ones creditors. Even short-term problems can lead to bankruptcy if creditors refuse to wait for their payments.
Cash Reserves
The cash flow statement should manage to show a cash balance of at least thousands of dollars at all times. This acts as a safety net to pay for unforeseen expenses, to cover the losses of expected revenue, and to allow for the company to take advantage of certain opportunities that may arise. Consider that personal financial advisors recommend a cash reserve of three to six months worth of expenses. The more uncertain your future revenues are, the closer your business should match these cash reserve levels.
Eric Powers is associated with Growthink, a business plan consulting firm. Since 1999, Growthink has provided business plan development services for more than 2,000 entrepreneurs and business owners who have raised more than $1 billion in growth capital. Call 800-506-5728 today for a free business plan consultation with a Growthink business plan writer.

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