136 | HOW TO WRITE A BUSINESS PLAN
starts out high. That means her total
cash investment will be limited to the
amount from her Capital Spending Plan
or $162,500. She chooses not to reduce
that amount by subtracting any of her
first year’s cash flow from the total so
she can have a salary for herself.Check for Trouble
You have completed most of the founda-
tions on which your business will be built.
The Cash Flow Forecast ties together all
the previous work and allows you, or your
backers, to see exactly how your business
will function. I hope that you have gained
an understanding of the relationship
between sales, expenses, cost of sales,
profits, and cash flow by completing your
Cash Flow Forecast. If so, that under-
standing will help you a great deal in the
future.
If you still aren’t clear about those
relationships, it is worth a little time to
review your forecasts. It’s important that
you understand where the money comes
from and where it goes. If necessary, take
your forecasts to a business advisor or a
friend who understands cash flow analysis
and ask her to explain them to you.
Don’t be surprised if the answers you
develop aren’t the ones you expected. It
may mean that the business won’t work or
that you need to polish your plans a little.
It could just mean that you have made a
mistake in arithmetic. It’s best to let the
Cash Flow Forecast rest for a day or two
before looking for the problem.
No forecasting technique can ensure
that your business will succeed. In addition
to the problems outside your business that
the future may bring (discussed in Chapter
3), you may have built into your plan some
money problems that are lurking there,
waiting to sabotage your efforts. Your only
protection against problems like these is to
know your business thoroughly. Sad to say,
what you don’t know can hurt you.Antoinette’s Inventory Problem
Antoinette estimated her first year’s sales
at $450,000 and her cost of sales at 60%.
She also figured her opening inventory at
$30,000. Unfortunately, this means she has
to turn her inventory 9.0 times per year
($450,000 × 0.6 0 ÷ $30,000), just to meet
her plan. This is not very likely.TiP
Calculate inventory turnover by
dividing annual cost of sales by inventory at
cost. If annual sales revenue is $450,000 and
cost of sales is 60%, then annual cost of sales
is $270,000 ($450,000 × 0.60 = $270,000).
Inventory of $30,000 at cost divided into
270,000 equals 9.0 inventory turns per year.Antoinette should probably plan for a
more realistic inventory turnover of 3.5
times per year, which is typical in her
business. To do this and end up with
$450,000 in sales, she would need an