Estimation of Cash Requirements

Top 5 Tips

1. Chart your expenses through an entire annual cycle. Take care not to miss those annual payments such as property taxes that may not show up in a shorter period.

2. Don't adopt your most optimistic sales plan as fact. Be prepared for a struggle.

3. Do your homework. Before estimating the cost of a piece of equipment, check with the vendor. Before assuming you know what business insurance costs, get a quote.

4. Don't equate sales with cash. Allow an adequate period for collection since your financing package will need to carry you.

5. Prepare an intelligent estimate which shows that your understand your business. Lenders need to have confidence that you understand your business and not just your trade.

Checklist for estimating one-time costs

• Preparing the building - construction / remodeling
• Acquisition of furniture and equipment
• Equipment installation and training
• Initial inventory
• Required licenses
• Publicity costs
• Professional fees - legal, accounting, etc.
• Cost to establish sales and distribution channels
• Peak level of accounts receivable before positive cash flow
• Estimated negative cash from operations before positive cash flow
• Emergency cash equal to at least first month's negative cash flow
• Other expenditure peculiar to your business

Estimating negative cash from operations

Owners' required compensation

Employee salaries and benefits

Rent or mortgage on property

Advertising

Telephone / Utilities

Insurance - property and liability

Taxes and licenses

Product distribution costs

Office supplies

Facility maintenance

Other expenses peculiar to your business

Total estimated operating expenses

Less current month sales x % collected

Less accounts receivable x % collected

Add anticipated debt service

Anticipated negative cash flow from operations

Prepare monthly until the venture is clearly in the black. Add the cumulative negative cash flow to your estimated cash requirement.