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Before you start planning for the cash needs of your new business, you must determine how much cash you will need to survive. You have to plan cash needs during the startup and first few months of your new business. It would be nice to think that your business will be profitable from the day you open the doors, but that's not realistic.
The best way to start is to prepare a family budget schedule that shows where you spent your money in the last 12 months. It is advisable to use a monthly family budget schedule because expenses will fluctuate greatly from month to month. For example, if you have children in private school or college and the tuition is due twice a year, then those months will require additional cash. Similarly, there can be seasonal variances in utility costs based on heating and cooling requirements.
In your family budget schedule, include all the expenses that you have incurred on a monthly basis. These expenses range from home mortgage payments to vacations to doctor bills. When preparing the schedule, keep in mind the expenses that could be reduced or eliminated if needed.
Let's go through the abbreviated monthly family budget schedule provided below. First, a couple of assumptions: the husband will be the one starting the new business and quitting his current job, and the wife will continue earning a comparable wage.
In January, this family would be able to live on just the wife's wage and other income. But, looking at February, this family would be short by $525 for the month. When you go through your monthly analysis, you will probably find that in some months you have extra cash, while in others you will be short of cash.
If the month that you are short is the result of some unexpected bill, like a major repair on the car, exclude that amount when you are trying to determine income needs for the new business. You should always have an emergency fund for these types of expenses. If the extra bill is to pay for school tuition, budget for this so that you have the money when needed. If the extra expense was for a long vacation, you need to determine your cash priorities. If every year you think you need to spend that money on a vacation, then include it in your budget; if this was a one-time vacation, then exclude it in planning your future budget.
As this condensed budget shows, this family would be a little short in the annual total. With a few discretionary cuts, they would be able to live on the one wage income while the new business is being started and until it is profitable.
|Monthly Family Budget Schedule|
Now go back to the monthly family budget schedule and make changes that reflect the opening of the new business. For instance, make the husband's wage zero and compute the amount of income needed to live.
After you have determined what income you will need to support yourself and family during the development of your new business, what comes next? How long are you willing to go with a loss in your new business? How long are you willing to be just scraping by and having only enough to pay the business expenses? Finally, how much income do you want to make in your new business? At this point you should have the goal in mind (and written down) and the information that can answer these questions.
Potential new business owners should consider a one- to three-year plan for family survival, at a minimum. Lack of staying power, especially in small businesses that may not generate enough cash to live on for a year or two, is one of the reasons that small businesses fail.
If your goal is to make $50,000 per year, you will need to determine whether your new business is capable of generating that much income in its present form. See our discussion of managing your cash flow for more information.