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									SCORE                              ®
Counselors to America’s Small Business

                                         Managing Your
                                         Cash Flow Forecasting Begin with
                                                   Four Budgets
                                                 Sources of Equity
                                                  Sources of Debt
                                               Forecasting Cash Flow
                                                 Break-even Point
                                            Other Financial Statements
                                            Starting Your Business with
                                               Other People’s Money
                                         Most Common Problems With Loan
                Managing Your Money
          Numbers- The Language of Business
          Records- The Tools of Money Management
          Financial Analysis- The Key to
           Understanding Performance
          Cash- The Life Blood of Business
          Forecasting Cash Flows is a key to success
                   WHEN YOU’RE OUT OF CASH
                   YOU’RE OUT OF BUSINESS               2
             Basic Financial Statements
          Profit & Loss Statement (also called income statement)
          Balance Sheet
          Cash Flow Statement
           – This is the most important financial statement

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                 Profit & Loss Statement
                 Reflects performance over a period of time

           Gross Sales (Revenue)
           -   Cost of Goods Sold     Cost to buy or make the product sold

           Gross Profit                Variable expenses (costs which vary with sales
                                       Fixed (or period) expenses
           -   Operating expenses      Depreciation
                                       Selling expenses
           Operating Income            General & Administrative expenses

           -   Interest expense
           Net Income before taxes
           -   Income taxes
           Net Income (Profit)
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                                     Balance Sheet
           Displays net worth of business at a given point in time

           Assets (what you own)                           Liabilities (what you owe)
           +    Cash                                       + Accounts Payable
                                                           + Accrued Taxes
           +    Accounts Receivable
                                                           + Short-term Notes Payable
           +    Inventory
                                                           + Current due on Long-term Debt
           Current Assets                                  Current Liabilities
           (convertible to cash within one year)           (Collectible within one year)

           +   Equipment                                   +     Long-term Notes Payable
                                                                 (Payable in longer than one year)
           +   Furniture & Fixtures                        Total Liabilities
           +   Property
           -   Depreciation                                +     Owners Investment
           Fixed Assets                                    +     Retained Earnings (income reinvested in the
           (longer than one year to convert to cash)
                                                           Net Worth (Equity of the company)

           TOTAL ASSETS                                =   TOTAL LIABILITIES+NET WORTH                         5
                   Cash Flow Statement
           Equity Investments
           = Total Cash available before business start up
           - Cash expenditures for Start-up
           = Cash available at the beginning of month 1
           + Cash received during each month from any source
           - Cash paid out during each month
           = Cash available at the end of one month and the
             beginning of the next month
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                       Cash Flow Forecast
                       Begin with 4 Basic Budgets
      1.    Personal Budget
             –   Make sure minimal personal needs are met

      2.    Start-up Budget                                    Typical Budget Period
             –   Cash required to begin your business          1st year: Month
             –   Sources of Funds: equity + debt               2nd year: Quarter
                                                               3rd year: Annual

      3.    Expense Budget
             –   Forecast of all expenses: Variable & Fixed

      4.    Sales Revenue / Gross Margin Budget
             –   Forecast of sales revenues and gross margin
             –   Comes from the marketing plan

           Add a fifth budget for those of you in Service Business – TIME BUDGET
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                    Personal Budget
          Your income and expenses now and after
           the business starts
          Your bank balances over past few months
          Show how much money you must take out
           of the business to live on … this is your
           minimum owner’s draw

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                       The Start-up Budget
                Non-repetitive - one time expenditures prior to opening your business

          Capital Items
           – Real estate including improvements; equipment, vehicle

          Initial inventory
          Other one-time Expenses
           –   Licenses and permits
           –   Professional fees
           –   Rent and Utility deposits
           –   Pre-start up advertising and promotion
           –   Contingency funds

          Working capital
           – Funds required to offset anticipated cash pull down until break-even
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                     Initial Inventory
                      is a function of Sales Potential

          Sales                      = $1 million
          Cost mark up               = 100%
          Cost of Goods              = $500k
          Inventory turns            =5
                                      (from industry benchmark)

          Inventory required         = $100k

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               Financing Start up Costs
                         Sources of Equity
          Your own savings
          Borrowing against collateral
           – Home equity loan / refinance
           – Borrow from pension funds

          Informal borrowing from family and friends
          Credit cards
          Equity from Partners or Investors

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                    Financing Start up Costs
                               Sources of Debt
              Your bank
               –   Personal loan
               –   Business loan*
               –   Community Express loan*
               –   Line of credit
              Other financial institutions
               – 504 Certified Development Company*
               – SBA-licensed Small Business Investment Companies
               – Houston Business Development, Inc.
               – Accion Texas

                        * SBA guarantees these loans up to 85%
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               Financing Start up Costs
                     Other Sources of Debt
          Credit from suppliers (trade credit)
          Loan against inventory (Floor planning)
          Equipment vendor financing (Lease instead of Buy)

          Factors (cash advance against accounts receivable)

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                     The Expense Budget
          Variable expenses (costs which vary with sales)
           – Delivery, credit cards, material, utilities, sometimes labor

          Fixed expenses
           – Payroll, rent, supplies, owner’s draw, Debt repayment

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                  Sales Revenue Budget
          Forecast sales volume
           – Industry data including competitive analysis
           – Historical experience or industry benchmarks
           – Seasonality if appropriate

          Forecast margin
           – Difference between sales price of an item and gross cost of making
             or purchasing that item
           – Includes materials (or merchandize), delivery and other variable

          Disaggregate by products and services
          List key assumptions

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                            Revenue/Margin Budget
                                         (from Marketing Section)
           Month                        1   2   3   4    5   6   7   8   9     10   11   12   YEAR

           Number of units you
               expect to sell
           Average sales price

           Average cost of sale

           Gross margin
           = price - cost

           Gross Profit
           =Sales units x gross margin

                                             Build one table per product line

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                             Break-Even Analysis

            Cash Fixed Costs
           losses added to
            start-up costs

                                              Time (months)
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                             Break-Even Analysis
                Over-estimating Income
   $                                                 Sales are

            Cash Fixed Costs
           losses added to
            start-up costs

                                                Time (months)
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                             Break-Even Analysis
                Under-estimating Expenses
   $                                                        Sales are

           Expenses are higher than forecast

            Cash Fixed Costs
           losses added to
            start-up costs

                                                    Time (months)
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           Break-Even Analysis

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           Break-Even Analysis

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       Manage Cash on Regular Basis
                     Owner Keeps Control of All Cash

          Open separate bank account for your
           business ASAP
          Deposit all receipts “in tact”
          Use a “petty cash fund”
          Separate sales tax receipts on your books
          Hang on to cash as long as possible
          Reconcile your bank account at least monthly
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                      Keep Good Records
               So you can Analyze Your business

          Measure performance
           – against industry (ratio analysis)
           – today vs. yesterday vs. same day last year (trend analysis)
           – How did I do vs. how did I say I would do (actual vs forecast)

          Recognize red flags; use as diagnostic tool
          Determine cash needs
          Control inventory
          Take advantage of cash discounts

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                     Measure Performance
                                     Financial Ratios
          Measure of Comparative performance
          Helps identify potential problems
          Types of Financial Ratios
           – Profitability Ratios
                Measure the efficiency of the business and the owner’s return on investment

           – Liquidity Ratios
                Measure the ability of the business to meet its financial obligations

           – Leverage Ratios
                Measure the business risk arising from the debt structure of the business

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              Three fundamentals of
             sound cash management
      1.   Have adequate cash and a reserve fund at
           the start of the business
      2.   Manage cash on a daily basis (or on certain
           days of each week)
      3.   Prepare and maintain a cash forecast for at
           least six months into the future

             CASH is Your Most Important Asset

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                Take Home Messages
          When you’re out of cash you’re out of
          Budget, budget, budget!
          Keep good records
          Analyze your cash flow and business
           performance regularly
          More inventory turns means more cash!

          Bug SCORE for free counseling
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SCORE                              ®
Counselors to America’s Small Business

                               Starting & Growing
                               Your Business with
                              Other People’s Money
           The First Tough Truth   

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     What Do The Lenders Look For?
          You … 5 C’s of credit:
           –   Character.…...Credit score, etc.
           –   Collateral…….Assets
           –   Capacity..……Ability to pay the debt
           –   Conditions..…Economic conditions of area and industry
           –   Capital…..…..The amount you will invest

          Purpose of the loan
          Your Experience
          Your Business Plan

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                 Build Your Reputation
          Find an unmet need and get started
          Learn your business, if you haven’t already
          Learn how to manage money
          Establish your credit rating
          Gather some seed money from people who
           know and believe in you (like yourself)
          Prepare a business plan
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           Learn to Manage Your Money
          Have a realistic, economical personal
           budget and stick to it
          Keep good current records … whether you
           like to or not!
          Keep business and personal funds
          Prepare a financial plan for your business.

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               Build Your Credit Rating
          Buy things on credit and pay the bill on time.
          Don’t use most of the credit lenders are
           willing to give you. (30%)
          The longer you do this the better. (15%)
          Use different types of credit. (10%)
          Once started, don’t make many new credit
           applications in a short time. (10%)
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           You Can Easily Check Your
                 Credit Status
                        One free report from
                         each agency each
                         year at
                        Get a credit score
                         estimate for $6.95.

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             With Business Reputation
           Financing Becomes Available
          Community Express; HBD Fast Track
           Loans; Accion of Texas
          Trade credit – supplier, equipment vendor
          SBA 7(a) loan guarantee program (up to
           $1.5 million) through commercial banks
          HBD Direct and Tandem Loans
          Community development lenders
          Small business investment companies
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              Working With Your Lender
          It is never too early to start
          A small bank might be best … relationship
           trumps interest rate
          A good credit rating is a big plus
          Describe your personal financial status
           – Share your Personal Budget
           – Provide all tax returns for past 3 years
           – List any lawsuits, bankruptcies
          Describe your financial needs
           – Specify Amount and length of loan
           – Display sources and uses of funds – be complete and specific
          Share your business plan
           – Include financial statements
           – Show how you will pay back the loan        Be open - Tell
           – Show why you will succeed                    it like it is     37
           Most Common Problems With
                 Loan Requests
          Inadequate equity for the type of business
          Inadequate collateral
          Inadequate debt coverage in repayment
           plan (which includes personal spending)
          Management ability
          Poor owner credit score
          Careless assumptions used in plan
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SCORE                              ®
Counselors to America’s Small Business

                                   Thank You!

                                         Keep in touch.
                    Accounting Methods
          Single Entry - Cash Basis
           – Very simple - (like household accounting)
           – Recognize income when received
           – Recognize expenses when paid

          Double Entry - Accrual Basis
           –   More complex - - need an accountant
           –   More financial reports generated
           –   Software is more difficult to use
           –   Recognize income when earned
           –   Recognize expenses when incurred

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                                 An Example
          Start up costs                        Start up financing
           –   Fixtures                  65       – Equity             35
           –   Pick up truck             15       – Debt               65
           –   Inventory                  5            Total          100
           –   Cash on hand              15
                   Total                100

           Fixed Asset Life = 5 years              Debt Term = 5 years
           Annual Depreciation = 16                Interest = 11%
                                                   Annual Interest = 7
                                                   Principal payment = 13

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                                         Example                             (continued)

          1st year operations:
           – Revenue                                   100 … but collect 97
           – Cost of sale                               67 … but pay 65 and then build                       3 of inv.
             Materials; Direct Labor; Delivery, etc.

           – Fixed costs                                12
             Craft Supplies & Artists; Shop & Truck Rental; Advertising, Utilities, Insurance, Legal, Accounting

           – Owner’s draw                               12
             Minimum amount needed to live on

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           Cash Flows - Year 0

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           Cash Flows - Year 1

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           Beginning Balance Sheet

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           Income Statement

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           Ending Balance Sheet

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           Cash Flow Statement

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           Income vs. Check Book



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