Think in terms of monthly cash flow. In the beginning, more money will be going out than coming in. This is natural since you have more startup costs than customers. You want to run your projections out for at least 24 months and provide as much detail as possible, so you not only know how much money is supposed to go in and out, but where it is going.
When combined with your startup costs, these projections will give you an idea of how much cash you need to have on hand to take your business through its first two years. Obviously, you want to start moving into the black (i.e., you’re profitable) as quickly as possible, but you need to be honest with yourself and expect to run at a loss for some time. It’s easy to think that a friendly handshake in a meeting or a signed purchase order will turn into money in the bank. Remember, however, that the only number that counts is the balance in your bank account at the end of the day, week or month. Be conservative in your projections and spending. Question every expenditure before you approve it and don’t count a single cent until it shows up as a deposit.
Profit & Loss (P&L)
As noted above, cash will come in and go out. The Profit & Loss Statement expresses this in monthly terms for the first two years you’re in business. The formula is expressed as: Revenue – Expenses = Profit or (Loss).
The Balance Sheet should also cover Year 1 and Year 2. A Balance Sheet shows you the big picture of your business’ health and is expressed like this: Assets – Liabilities = Net Worth or (Equity)
The good thing is that these days there are lots of resources online to do all these calculations and planning. Our SizeUp tool is an excellent place to start. You can enter your projections and see what other businesses in your area or state report as their averages. This can help you develop your two-year projections for cash flow, profit & loss and your balance sheet.
Now, to answer the big question: Where do you get the money to either open a business or expand it?
Bookkeeping & Record Keeping
If you set up a bookkeeping system, and you should, these things take care of themselves. For the do-it-yourself crowd, a program like QuickBooks will do the trick. If you want some online options, Freshbooks has a wonderful invoicing system and GoDaddy has an online bookkeeping system that ties in your credit cards and bank accounts so you can manage all of your account categories, view trends and manage your paperwork in a single interface. You may want to hire a bookkeeper too, to do your annual tax filings. This is a snap, since QuickBooks and GoDaddy organize all your records to parallel IRS filing requirements.