ChApter 7 | YOUR CASH FLOW FORECAST AND CAPITAL SPENDING PLAN | 123
- initial working capital. This consists of
the cash reserves you need to keep
your business afloat before you begin
to show profits every month.
Commonly, cash flow from monthly
sales is not enough to cover monthly
expenses for the first few months after a
new business opens. If your Cash Flow
Forecast shows a negative picture for this
period, you need to have extra money set
aside for initial working capital. Your initial
working capital keeps the doors open until
cash flow from monthly business becomes
positive. If your Cash Flow Forecast shows
you’ll run a cash deficit for several months,
don’t be too concerned. Just be sure you
have enough initial working capital to
cover it. But if your Cash Flow Forecast
shows a continuing cash deficit, or a
deficit that rises over time, your business
may have some fatal flaw and you should
reexamine the whole idea before making
any commitments.
Growth, too, can create problems. Many
businesses that grow quickly suffer severe
cash flow shortages because money from
sales does not come in fast enough to
cover the investment needed to expand. If
you find yourself in this situation, you will
need to reduce your growth rate or find
extra sources of money. (See the cash flow
discussion below.)
So, let’s put a close-up lens on our
camera and focus on cash forecasting.
Here again, it’s necessary to get out your
calculator or computer and play with some
numbers.
Prepare Your Capital Spending Plan
Your capital spending plan includes all
the things you have to buy before your
business begins bringing in sales revenue,
including opening inventory, fixtures and
equipment, business licenses, deposits for
the building lease, and whatever else you
need.
Open a computer file or take out a
clean sheet of paper and write “CAPITAL
SPENDING PLAN” at the top. Now, make
a list of all the things you’ll have to buy
before you open. This will enable you
to make a good estimate of the cash you
need to open your doors.
The list shown below sets out many
common items businesses need to
purchase before they are ready to open.
Some of the items you’ll buy will be
considered capital items, which depreciate
over their useful lives. All preopening
expenses represent your capital investment
in the business, regardless of whether they
are treated as capital items or expense
items. If you have doubts about whether
an item can be depreciated, ask your
accountant.
Now assign specific dollar amounts
to each item on this list. If you’re unsure
about the cost of an item, ask the person
from whom you’ll buy the item for an
estimate or a quote. Try for plus or minus
10%. Remember that you’re trying for an
accurate estimate here, so use the numbers
you think are right. Most experienced