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Wednesday, July 25, 2012

Business Plan Step One - The Budget

My preference when starting a business plan is, first develop a cash flow budget.  New business,  growing business or buying a business every action requires some investment of money with the purpose of making a return on that investment.  Therefore, before writing a business plan I want to have an understanding of what financial commitment will be necessary to enable this business to be profitable and finance eligible.

Purpose of a Cash Flow Budget
Preparing a cash flow budget is to understand how money will move through the business over a period of time. Most businesses can plan on a monthly basis while other like construction or manufacturing may need to plan on a weekly basis.

Cash flow budget is to reveal the money needed to fund seasonal sales and operating cycles.  For example, a retailer may need to spend money to buy inventory several months before the inventory is received and sold.  Or, for a landscape business how much of the money earned in the summer must be saved to survive the winter?

Cash Flow helps schedule business activities such as adding labor when sale are strong.

Cash Flow identifies financing needs and structure. A line of credit for short periods, or term loans for capital equipment purchases.

Cash flow planning is all about when money goes out and when money comes in. This is not a profit & loss model, nor concerned with non cash items like depreciation

Compare your budget to actual revenues and expenses. Determine if you are reaching your goals, costs are as expected. If not you can take corrective actions to reduce planned expenses and increase sales activities.