SPECIAL ITEM:

CASH FLOW - KNOW IT, TRACK IT.

CASH FLOW IS SIMPLE

Cash flow is simply the flow of cash into and out of your business. Cash is most easily viewed as what you have in your bank accounts (checking, savings, etc.) Since cash is what you have in the bank, “cash flow” is the amount going into and out of your “bank accounts” in a day, a month or a year. Simple as that.

You should know the details of this “flow” on a monthly basis.

“POSITIVE” CASH IS CRITICAL

Cash is certainly one of the most important aspects of a business. Some say it is the most important item in a business. You do not want to run out of cash. The term for this is insolvency. It sounds bad and is bad. It could spell the end of your business.

It is also very important to understand that your “profits” ARE NOT your “cash.” This is a normal misconception. Profits are recorded on the income statement and are “what you pay tax on.” They become cash when you receive and cash the checks for the services or products you provided. Not before. Cash is what you have in your hands (not in the mail).

Your cash position is recorded on the Balance sheet, which is simply a statement of what you own and what others own of your business.

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A CASH FLOW STATEMENT

With the recognition that cash and its management are important (your “bank accounts” management), let’s discuss the approach you can use to stay “on top” of it. The objective is to keep that “bank account” comfortably above zero!

The “cash flow statement” or “statement of cash flow” is the most important financial planning tool available to you. It tells you what is coming out of your bank accounts and what is going into them. It allows you to manage your business not only for profitability but also for survival.

In its simplest form, a cash flow statement is a list of the checks you wrote in a month and the checks you received from others (assuming they are deposited.) The difference between these two numbers is “net” cash flow.

The cash flow statement is a little more refined format that allows you to see where and when cash flowed in and out of your business over a period of time and in a repeatable manner. The same format allows you to project your cash flow for future periods of time. This is important. The advantage of knowing when cash outlays will be made gives you the ability to plan for expenses rather than being forced to borrow to meet unexpected cash needs. Thus, a cash flow projection naturally becomes your annual budget.

A simple statement may look something like this. It should be done on a monthly basis. This one happens to be annual. Notice what is coming in and what is going out? You have similar activities.

More detailed cash flow statements may have much longer lists of what is going into and out of cash. This is where an accountant becomes important. However, the principal remains the same.

PREPARATION

In order to prepare a cash flow statement, you will need solid financial information. this should be accessible through an established bookkeeping system that will provide you with the raw data for three documents: Your balance sheet, your profit and loss statement and your cash flow statement.

If you can only have one of these three documents available at all times, it should be your cash flow. You should place positive cash flow ahead of profitability; your primary concern is staying in business — profitabilty will come later.

WHAT IT TELLS YOU FOR PLANNING PURPOSES

The information you will garner from a solid, detailed cash flow statement and projection will show:

1. The amount of cash your business needs on a periodic basis: monthly, quarterly, or annually.
2. When cash is needed during these periods of time.
3. Whether you should look for equity (investors), debt (banks and such), profit or asset sales.
4. Where your cash will come from.

Completing the cash flow projection is only the first step. You’ll need to spend some time analyzing the information you’ve put together.

1. How much cash?
2. When will I need the cash?
3. How do I get cash?
4. Where am I losing cash?

Reference material may be found on the SCORE NATIONAL web site.

Example forms ready for you to fill out may be found at:
http://www.score.org/template_gallery.html …12 mo. CASH FLOW STATEMENT.

A CASH FLOW VIDEO.

CLICK ON THE PICTURE AT RIGHT>

Dated March 2, 2009 Topics: Cash Flow, How To's

TO START, GROW, OR RECOVER.

As many businesses know, there are thousands of no-cost grants available for the businesses which seek them out. Funds ranging from thousands to hundreds of thousands of dollars are available if you develop the knack.

Your Cedar Rapids area SCORE® chapter is happy to make you aware of a couple sources to explore. In some cases, we can also help you learn how to succeed in securing grants. It never hurts to give us a call.

One of the best ways to begin your exploration of this topic is with a visit to the grand-daddy government grant sites: www.grants.gov or click image:

HELPFUL TIP SHEET: MORE SOURCES OF GRANTS

The Cedar Rapids Area SCORE® Chapter has assembled a brief tip sheet on the location of other grants, should you wish to review it. CLICK HERE FOR MORE GRANT LOCATIONS in a printable copy and/or to peruse it on your computer.

———————————————————————-

GET FREE HELP as you begin to seek out alternative funding:

• CEDAR RAPIDS CHAPTER:
  Including Benton, Cedar, Jones & Linn Counties.
  IT’S ABSOLUTELY FREE. We help as long as you feel it necessary.
  Call 319-362-6405 ext 2005 or:
• NATIONALLY: www.score.org or call 1-800/634-0245
• GREAT READING : http://www.score.org/readingroom.html

SCORE is a nonprofit organization of more than 10,500 volunteer business counselors who provide free, confidential business counseling and training workshops to small business owners.

Dated March 1, 2009 Topics: Finance and Accounting, How To's

SPECIAL LESSON

SUCCESSFULLY STRUCTURING YOUR BUSINESS

What form should my business take? This is often the first question aspiring entrepreneurs ask themselves. Should I form a corporation? Does a sole proprietorship make sense? Do I need to name my business? How do I register my business’s name and what does that mean?

BE SURE TO SEE ACKNOWLEDGMENTS AND DOWNLOAD OPPORTUNITIES BELOW.

While these should not be the first things that you think about when kicking off a business—business planning should be—it is worthwhile considering some of pros and cons of the various business forms. The business form you finally select can affect your taxes and can serve to protect your personal wealth. Sometimes, the selection can save you time, money, and legal worries, as well.

The objective of this article is to demystify the process for you. We’ll discuss some of the business entity basics, refer to what experts have to say about each form, and present you with access to two excellent presentations on the subject.

This is only a start, though, and no substitute for consulting one-on-one with experienced experts. It is always wise to seek legal and financial accountant advice—and seek out advice from SCORE®.

Simplest and least costly forms

There are three basic forms for you to consider first.

The simplest form of business entity is a sole proprietorship (refer to diagram 1 below.) Recommended for many small businesses, a sole proprietorship is your best choice if your legal risks are minor, you don’t plan to employ more than a few people, and your tax implications are not significant.

The second choice, the S-Corporation is good for small businesses who expect to encounter some legal risk and more tax challenges (refer to diagram 2 below.)

Limited Liability Partnerships, the standard Corporation or C Corporation, makes sense for the rest. (Limited Liability Corporations and Partnerships will not be discussed here, but are discussed in the PDF presentations accompanying this article.)

1 SOLE PROPRIETORSHIP TOP-LEVEL STRUCTURE

2 CORPORATION TOP-LEVEL STRUCTURE

If you are just getting started, the Sole Proprietorship and S Corporation are worth considering. They appear to be the lowest cost to manage & maintain. In the case of the S Corporation, it provides a sensible balance of tax and liability advantages for the small business owner.

3 Sole Proprietorship pluses and minuses

4 S Corporation Defined (Note the tax points.)

Larger business considerations

If you expect to build a large business and have many stockholders, a regular C Corporation might be a better choice (refer to diagram 5 below.) It should be noted that you can change your business form as circumstances warrant. Your business form should be reviewed periodically to ensure it is aligned with your business type and interests.

Where is one to start, how to decide

Home businesses, by default, are sole proprietorships if they involve one person. You need not do anything to assume this form. It is the default form assumed by the IRS and other governmental institutions. For tax purposes, all you likely need is your social security number.

However, this form is not the best if you think you may encounter liability exposure such as personal injuries, product warranty issues, etc., in your business. Also, there are some tax related “downsides” to the sole proprietorship, as shown in the diagrams. In this case you may wish to consider a form of business that separates your personal wealth from that of the company. You might need to go directly to one of the Corporate forms.

5 S Corporation LIMITATIONS

How to find help

When the time has arrived to consider the form of business, perhaps sometime after you plan and begin to build the business, we recommend you visit SCORE® or some of the other free business counseling services, such as the SBDC (Small Business Development Center) at Kirkwood, to get some pointers and advice regarding how to step logically through this process.

If you have a family lawyer, you can also consult him or her. There are also some very low cost legal advisory services in the state of Iowa that can help you make decisions. Contact SCORE® Counselor for further information. There is no reason to spend a lot of money in forming a business, so look for sensible, high quality yet affordable advice. Study, learn, understand completely and then act.

TWO COMPLETE “BUSINESS FORM” PRESENTATIONS

If you wish to read more, please download the presentations below. They are in PDF form.

CLICK ON IMAGES TO DOWNLOAD EITHER OR BOTH.

ACKNOWLEGEMENT AND THANKS
The helpful diagrams in this article were provided courtesy of Amanda M. D’Amico, of Moyer & Bergman PLC, Attorneys at Law.

Ms. D’Amico is a past presenter in SCORE®’s “How to really start your own business” business startup course which is offered 3 times a year for a modest price. It provides a wonderful opportunity to learn about business forms and all other topics related to starting and managing a business. See THIS LINK for more information.

Dated March 1, 2009 Topics: Business Planning, How To's, Tax Info

SPECIAL LESSON

BUSINESS PLANS: MAKING A “WINNER.”

• Does the thought of assembling a business plan bring on anxiety?
• Do you question why you need one?
• Do you find yourself wondering what others expect in a Business Plan?
• Do you wonder how to start?

Constructing a business plan can intimidate many aspiring entrepreneurs. In this special lesson, we will demystify this often scary business necessity; discuss how it can be a valuable learning experience and perhaps even fun. We will walk you through four simple steps to arrive at a Plan and clarify how it vastly improves your chances of success. While there are many volumes written on the subject, we thought you might benefit from the basics that have built successful global businesses right here in Cedar Rapids.

Getting in the mood

Business planning can be a fabulous and joyous exercise if you view it as a sales pitch for the “doubters” in your world; the people who have implied your idea won’t work. Entrepreneurs, by definition, are folks who know they have a better idea than others who have gone before—regardless of what anyone else thinks. If you view the business plan as a production to unequivocally convince others that you are about to take the world by storm, you will find yourself in the right frame of mind. Better yet, if you keep asking yourself “Am I crazy?” until you have documented your business well enough to answer “No Way”—and have others say the same thing―the result will be an outstanding Plan.

Debunking some myths

• Business Plans are NOT DONE for the bank. They are done for your survival. They are your personal “roadmap.”
• Business Plans do not need to be fancy, multicolored, word-processed, high quality documents. In fact, a set of chicken scratched documents are as good as any to start if they truly answer the “Am I nuts?” question above.
• Business Plans do not need to be lengthy. Ten pages of information are plenty to get a plan across. In fact, let’s think ten pages—soup to nuts.

  (This is not to say you should not exhaust yourself reading, studying, considering and collecting information about the business you want to start, but all of this does not need to go into the plan. You may fill a file drawer with background information and calculations, but this is not your plan, this is research.)

A WARNING:

Have fun, spend some time on it. Three to six months planning usually results in a winner. If you adhere to the following four steps, you will greatly increase the chances of your business succeeding. Do any one wrong and you risk failure. They are that critical.

THE 4 PARTS TO A PLAN — 4 STEPS TO SUCCESS

1. PRODUCT DEFINITION – The first thing you must do is “define” your product(s).

   a. What is it the business sells and how do you describe each specific “product.” A product can be a service, part, system, project, program or whatever you choose to call it.

   The key is to first describe to a layman what it is in general terms; Example: We will produce a robot that walks around a room while singing the ‘Sound of Music’.

   If you expect to have more than one product, one product definition per page is strongly suggested.

   b. Once described in general terms, define each product as precisely as possible and give it a label. How is it built and what specific pieces make it up?
   This helps to determine cost properly—which is critical. (Product definition in too fine a detail is not possible—the more precise the better.) Example: Cup of Coffee consists of beans, grinder, water, means of flowing the water over the beans (brewer), containers, cups, cream, sugar, spoons, saucers, etc., etc. Exhaust yourself thinking of these things.

   c. If in doubt about how to do this, learn from an expert such as those at SCORE®. They counsel businesses at no cost.

2. “MARKET COUNT” – Define and then count the total potential customers (not the universe or mega-market but the ones you expect to reach over the next 18-24 months). Do this on a monthly basis.

   Fancy word: Market Characterization.

   a. FIRST, how do you describe your typical customer? List their characteristics with the key attributes first.

   b. SECOND, how many customers will you plus your competitors have for each product in each month for 18 months? (Not how many you will sell each month but how many are out there to sell to. You must assume you will not be alone.) Write this down for each month over 18 month period—preferably in 18 columns. (Note: Spreadsheets are great for this.)

   If the market is the same size each month for all of your products, that’s great. If not, and you feel the available customer number is growing or shrinking, do the forecast/prediction for each month and product.

   c. THIRD, how many of the potential customers will you sell your product to each month for 18 months? (Example: Month 1: 1; Month 2: 4; Month 3: 7; ….etc. to Month 18). If necessary, calculate this based on some assumptions. Be very conservative early on. The best businesses work very hard on this. Fancy word: market size and share.

   

3. COMPETITIVE APPROACH: List the Market Capture Tactics for winning over the customers you predicted above. You MUST know your competitors well and develop tactics that enable you to successfully compete with them.
   Fancy words: Competitive Advantage and Market Penetration.

   Write down the things you can and will do that the competitors cannot or do not do. These are called your “competitive advantages.” They must be good enough to get the unit sales you outlined above. The more, the better. One compelling advantage may be enough.

   Write down, by month, what tasks that you will undertake to make the sales you predicted above. This must support/justify the unit sales above.
   

   Anticipate and write down how your competitors may be able to outmaneuver you.

   Construct strategies you will use to counter each of the competitor moves if they make them.

4. FINANCIALS – Simply, start with the number of products you forecasted you will sell each month in 2.c. above and multiply TIMES the sell price of each product. This gets you sales by month.(You will need to decide upon your market pricing based on a customer’s willingness to pay. 2X product cost is a good rule of thumb for a rough price and test. This price or something close to it should make sense to a customer or you may be expecting too much.)TIP: Take some time to work up your sales price for each product or service. Have the detailed steps used to come up with pricing in your notes—one page per product.

   Then, by month:

   a. Subtract the COST of the product you sell (materials, assembly labor, other production costs). Work hard on this to get your costs right—missing nothing. (Again, recommend 1 page per product cost exercise in rough form.)
   b. Subtract any other costs (good to group in classes like General & Administrative, Marketing/Sales, Research, Product Development, Shipping, Other.) Your sales minus these two items (a. and b.) is your before tax profit.

FINAL THOUGHTS

Critical Scenarios–Looking at your business in three ways:

Business thoroughness requires you do the sales and financial forecasts for three (3) scenarios at a minimum. The three scenarios should always be: Plan (what you expect), High (if things go much better than planned), Low or Wipe-Out (if things go badly.) You may factor your base forecast up and down, if you wish, or do a “bottoms-up” plan considering a set of outside factors quite different from your “base” plan.

Financials are the last thing to do: The financial “wraps,” meaning a complete financial package to include things like the Income Statement and Balance Sheet over time, are pretty straightforward for someone who helps with your accounting and/or finances. They won’t help if the first three (3) steps above are done wrong. Get those right first–always.

That’s it. You’ve completed your business plan. Now that you’ve seen it all in four easy steps, it doesn’t’ seem that hard, right?

For deeper detail, and if necessary, CALL ON THE EXPERTS at SCORE®. We can serve as no-cost instructors, mentors, advisors and a sounding board as we develop your plan. All the mentors in SCORE® are proven “winners.”

Dated March 1, 2009 Topics: Business Planning, How To's