Business Startup – Operations Management – Part 1
Count every penny
Make sure that you have some financial education and training. It is important that you know about finances when you go into business. This is a big factor in the failure of many small businesses. The lack of ability to control the cost and manage accounts receivable has caused liabilities to grow out of control.
For many new business owners, a major obstacle in getting a business off the ground is being able to accurately project sales, maintaining cash flow and analyzing and creating financial statements. You can get a CPA to do all of this for you but it is important to have a general knowledge of how this illustrates and determines the path that your business is on. It is believed to be a major factor in why a lot of businesses start but only a small handful succeeds. The business that didn’t succeed usually had owners that did not understand the importance of being able to project there sales and control the costs in order to maximize profits.
There are just a small number of businesses that are able to start with unlimited capital. Being able to project sales and costs enable a business to know how long it will take them to reach break even and thus start to profit. It is advised to have a financial forecast for 2 or 3 years that includes profits and losses. You should have a monthly cash-flow statement for the first year. These projections will assist you in monitoring exactly where your financial situation is and what the immediate goals and needs are in order to keep the business viable until it is making a profit. It may be necessary to consider how you will raise additional capital whether it be personally, finding additional investors, or asking for loans from family and friends. Opening lines of credits and loans with banks are also options.
Projecting your financial situation can also help you understand the costs of creating and maintaining a business. It can help you decide if it is possible for you to create a viable business and the financial requirements of doing it. It can also help you determine if it is worth the time and investment or if it is in fact a bad idea. Not many businesses will make a profit in the first year. If your forecasts are illustrating this outcome crunch the numbers again to be sure you are being realistic about the revenues and expenses. Maybe your forecast predicts significant loses in the first year. Is there a way to reduce the costs and over head so that you can minimize these loses.
No matter what, forecast of finances will help you better understand your business and make it more viable.
These are some guidelines to better plan your finances:
• Sales Projections
What is the volume of units that you will sell the first year of your business? Who knows if you don’t? You are not supposed to know all the answers to your questions as the idea is it supposed to give you an idea. Do your primary market research. Get an idea of the size of your market and niche. Learn who your market is and what they want in order to project your sales. Talk to industry insiders to see what the reality is. How much can you sell and item for. What is the season of the product? What factors affect the climate of the market?
Most newcomers hope to capture %5-%10 of a market and make sales projections based on this percentage. However, industry insiders contest that usually only a minimal percentage of the market is willing to switch providers and that these projections can be off upwards of 50%.
Some claim that when starting you have to sell $80,000 in product to see $40,000 of profits. This could be thought of an optimistic. There is no single answer this just gives you an idea of what your expectations should be. Perhaps your projections should be done in monthly increments taking into consideration seasonal patterns. This will help you reach your goals on a monthly basis and better recognize a contraction in sales within the month.
• Learn to Calculate Costs
Sales projections are more of estimation and are derived from tendencies in the market. Cost calculations are more exact and direct. There is a formula that is used. You add the cost of the goods to the cost of your over head and the sum is the costs of production. You must analyze the cost that will be needed to produce the goods. You then need to analyze all the costs of the overhead like rent, raw materials and labor. Make sure you shop around to get the best deal on all costs. Avoid putting your self into a long-term agreement with a supplier as this limit your ability to shop around and find the best prices.
There are many costs and performance comparison resources that are available to help you analyze and determine if you are getting competitive prices for your costs.
• Cash flow Projections
Selling your product does not always result in receiving cash. A lot of clients will with terms of payment from 20 to 90 days. During this time period your may still need cash coming in to take care of your costs. It is critical that you forecast the cash flow that will be necessary to your business so that you may avoid a cash shortage.
