Learning Objectives: Recognize the importance of numbers and how to keep score with them

1. Learning Objectives: Recognize the importance of numbers and how to keep score with them Understand your responsibility in keeping track of numbers Determine start-up costs Discover ways to boot-strap your business Focus on pricing as part of overall strategy Determine seasonality scenarios Deal with recessionary pressures Develop sales projections and what-if scenarios Prepare projected income statements Learn that cash is king! Understand importance of the balance sheet: assets – liabilities = net worth/owner’s equity Determine feasibility and profitability through break-even analysis Explore financial software options Learn how to use industry financial ratios and benchmarks Chapter 8: Start-Up Concerns & Financial Projections -Researching & Preparing Numbers

2. Chart Your Business Future with Numbers • What will your start-up costs run? • Which months will be strong? Which will be weak? • What are your projected gross sales estimates? • Can you project cash flow? • What bank loans and other credit will be needed? • How many employees will you need? What will they cost? • Can you add people to the team who will bring cash? • What is your burn rate and how long can you survive? • How fast can your business grow? How will it affect cash? • Are you prepared for handling money in the business?

3. Five Areas to Consider • Start-up Costs • Can be minor or major • Bootstrapping is an advantage • Pricing • Low cost? Premium? • Freemium? Dynamic? • Seasonality Scenarios • Sales Projections • What-if Scenarios • Income and Cash Flow Statements • Balance Sheet, Break-even Analysis and Financial Ratios

4. Areas to Consider: A Closer Look • Start-up Costs and Concerns • Compete a Worksheet & Prepare for unexpected costs • Bootstrapping: Tips to Conserve • Get paid up front if you can & ask vendors for trade credit • Lease equipment & run a lean operation with no waste • Work out of your home or ask your landlord to make improvements • Resell what you can & take markdowns on dead goods • Use as little space as possible – it doesn’t have to be attractive if customers don’t visit your facility • Shop around when borrowing & make your cash earn interest • Add employees slowly and carefully • Open a line of credit & make “conserve cash” youu mantra • Seek Financial Advice and Support

5. Action Step 38: Attach Price Tags to Starting Your Business • Look around and list items you use every day • List expenditures for things you cannot see • Insurance, Rent, Utilities, Taxes, Legal & Accounting • Write down how much each expense will cost • Use the start-up worksheets as guides to develop your start up costs • Refine the numbers as you go so you will have an accurate representation of start-up costs for your Business Plan

6. Action Step 39: Preparing for Surprises • Brainstorm a list of surprises that could cost you time, money or threaten your survival • Ask business owners about their surprises and how they handled them • Talk to vendors, suppliers, customers & insurance brokers • Estimate your total potential extra costs • Decide how you will cover unforeseen expenses • How much money should you set aside for unexpected events?

7. Areas to Consider: A Closer Look • Pricing Your Product or Service • Price must be acceptable to you and your customers • Don’t make the mistake of charging too little or too much • Markups vary between types of business • Many customers today demand discounts • Common pricing methods: • Competitor-Based or Market-Based Pricing • Cost-Plus or Profit-Based Pricing • Industry Norm or Keystone Pricing • Premium Pricing • Other pricing methods: • Penetration Pricing and Price Skimming • Be flexible & expect changes when developing your strategy

8. Action Step 40: Discovering Costs and Developing a Fair Price • Review chapter 5 action steps and revise if needed • Use your answers to help develop your pricing strategy • Gather information from various sources to develop a list of activities and the costs you will incur • Determine actual expenses involved with each cost and activity • Price your product using the primary method for your industry • Consider how you want customers to view your product • Discuss major pricing issues you need to deal with • Complete a break-even analysis

9. Areas to Consider: A Closer Look • Seasonality Scenarios • Most businesses experience seasonal variations • Seasonal forecasting will become easier after a year in business • Economic Cycles • Cycles hit specific businesses and the broader economy • Sales Projections and What-if Scenarios • Sales drive everything else • Every number in your Business Plan should have back-up support

10. Action Step 41: Complete Seasonality Scenario and a Projected Profit and Loss (Income) Statement • Write a seasonality scenario for a typical year in your business considering obvious forces • Answer the following questions: • When does your industry collect money – before, during or after the sale? Long after? • When do you have to pay for inventory? • What are the time lags between paying for inventory and receiving money for selling that inventory? • Generate monthly numbers for the year and prepare an income statement including taxes

11. Income Statements and Cash Flow Projections • An income statement demonstrates on paper when you are going to make a profit • Income statements track revenues and expenses but do not tell the whole story • A cash-flow projection shows whether you can pay bills and when you will need a cash infusion to keep going • Projections include more than just sales • Cash-flow projections are a tool used to help you control money

12. 10 Critical Cash Flow Rules • Profits aren’t cash • Cash flow isn’t intuitive • Growth sucks up cash • Business to business sales suck up cash • Inventory sucks up cash • Working capital is your best survival skill • “Receivables” is a four-letter word • Bankers hate surprises • Collections Days, Inventory Turnover & Payment Days • If you’re the exception – hooray for you!

13. Balance Sheet • A picture of what your business owns and owes. Three categories make up a balance sheet: • Assets (anything of monetary value your business owns) - • Liabilities (money owed to creditors) = • Net worth (owner’s equity)

14. Break-Even Analysis • If you know your estimated costs (variable and fixed) and gross sales, you can use a break-even formula that will tell when you will start making money • A break-even analysis is particularly useful: • At start-up time • When you have completed your income and expense projections, and • When you are considering launching a new product or service

15. Leaving a Paper Trail and Software Applications • Download Starting A business and Keeping Records from the IRS • Don’t comingle business and personal accounts • Track expenses and keep receipts • Use a major accounting program to track your financial activity • Software should include word processing, spreadsheet, database management, accounting and bookkeeping and website development

16. Financial Ratios • Calculating a few simple ratios will help you with analysis • Lenders use ratios to determine the risks associated with lending • Ratios are control tools for maintaining financial efficiency and staying afloat • Current Ratio: Does the business have enough money to meet current debts? • Quick Ratio: Do you have cash on hand to pay your debts? • Return on Investment: Return expressed as a percentage of investment

17. Think Points for Success • It is cheaper and easier to make mistakes on a spreadsheet before you go into business • When you visit your banker, make sure you know how much you are going to need in the long run • Projecting your numbers will help you understand and control the variables of your business • Purchase accounting software on day one • Cash flow is king • Remember Seth Godin’s advice: “The goal, no matter what you sell, is to be seen as irreplaceable, essential and priceless. If you are all three, then you have pricing power” • Walk away if the business is not going to work financially