1. Chapter 8: Start-Up Concerns & Financial Projections -Researching & Preparing Numbers Learning Objectives: 1. Recognize the importance of numbers and how to keep score with them 2. Understand your responsibility in keeping track of numbers 3. Determine start-up costs 4. Discover ways to boot-strap your business 5. Focus on pricing as part of overall strategy 6. Determine seasonality scenarios 7. Deal with recessionary pressures 8. Develop sales projections and what-if scenarios 9. Prepare projected income statements 10. Learn that cash is king! 11. Understand importance of the balance sheet: assets – liabilities = net worth/owner’s equity 12. Determine feasibility and profitability through break-even analysis 13. Explore financial software options 14. Learn how to use industry financial ratios and benchmarks

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. 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? Action Step 39: Preparing for Surprises

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. 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 Action Step 40: Discovering Costs and Developing a Fair Price

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. 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 Action Step 41: Complete Seasonality Scenario and a Projected Profit and Loss (Income) Statement

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