The Entrepreneur’s Critical First Twelve Months
Start-up businesses typically work with a limited cash reserve. As an initial step in your planning process, prepare a cash flow projection for the purpose of finding the point at which the business will reach a “breakeven” point” and subsequently begin to generate a positive cash flow. Despite the amount of research carried out by entrepreneurs, often revenue projections are overly optimistic and operating costs underestimated. This combination of events can deplete the cash reserve and threaten the survival of the business.
To avoid this situation there are several steps entrepreneurs can take during the financial planning process and during the early months of operation.
Firstly, run several cash flow scenarios including both an expected and a conservative case with lower revenue and higher operating expenses. These scenarios will offer guidance in determining the appropriate beginning cash position. While the “breakeven point” for every business will vary, if reaching the “breakeven point” exceeds twelve months you should revisit your business model and the underlying assumptions. It is possible that your business concept is flawed and needs to be reconfigured. Also, don’t assume uninterrupted revenue growth. In the real world there will be plateaus and dips. What is most important is that there is an upward trend line.
Secondly, build a cash buffer amount into your cash flow projection --- between ten and fifteen percent is a reasonable amount. Remember it is extremely unlikely that a lending institution, family member, or friend will loan you additional funds.
Thirdly, typically the larger revenue opportunities take longer to materialize than planned. For example new products or services may require additional redesign or testing. Also, customer purchase decisions may face approval or funding delays. Therefore, in the early months seek out smaller revenue opportunities e.g. low hanging fruit. which can rapidly be transacted,
Fourthly, look for ways to conserve cash. Tightly manage receivables and work with suppliers to extend payment terms. Also explore leasing opportunities to meet equipment or a building needs Lastly, consider setting up a lock box and controlled disbursement accounts.
Fifthly, if your business is subject to seasonal revenue fluctuations, arrange in advance with your banker for a line of credit. This action will enable you to cover operating expenses during periods of soft revenue and be positioned to take advantage of periods of strong customer demand requiring inventory buildup and staff additions.
Al Torpie is a mentor for SCORE Savannah. Call the SCORE office at 912-652-4335 to schedule a no-cost, confidential appointment with one of our skilled small business experts and learn the research techniques necessary to understand your market and your competitors.