When will your new business start making a profit?
You often hear of businesses having cash-flow problems. Put simply, when the cash going out exceeds the cash coming in, the money runs out! When you’re starting a new business, it’s unlikely you’ll have an income or positive cash flow for a while until the business starts to get established. During this time, however, you are still going to have expenses: normal living expenses plus expenses to run the business, the car, service loans, pay for advertising, etc. This is when you need to have enough funds put aside to carry you through until your income exceeds expenses. Obviously, you need to keep expenses to a minimum during this period; otherwise you could run out of money very quickly. Your Business Plan should include a schedule or timeframe of when you expect your business to become profitable. You should expect to start making at least some small amounts of income soon after commencing your business. You should also create a Cash Flow Forecast that shows the income you expect and when you expect to receive it, plus the expenses you expect to pay and when you need to pay them. This is not only useful for your business planning, it will also be required if you apply for a business loan. To create a simple Cash Flow Forecast, record the following information on a computer spreadsheet, or a calendar or diary:
- the amount of money you have on the day the business starts
- the income you expect to receive, and the dates on which you expect to receive it
- the expenses you expect to pay, and the dates on which payments are due
- your running account balance, calculated after each entry