So far, you have created all aspects of your business plan, what’s still left is to estimate how much money will your business be making, based on an estimation of how much money will enter and leave your business. In order to make things clearer, I have included the chart below:

Business Plan Financials Explained

Business Plan Financials Chart

In the above chart, we have two items. Incoming money items in green, and Outgoing money in red. The net cash flow is the difference between incoming and outgoing money.

Total Incoming Money – Total Outgoing Money = Net Cash Flow

Below is an explanation of each of the incoming and outgoing money items.

Incoming Money

Opening Balance: This is any money you already have in your business bank account from previous operation. Since you’re starting a new business, this would be zero.

Investments: Any money that you receive in exchange for a share in the company. That applies to your own money as well. For example, if you’re investing $5,000 in the company, and you’re the only one investing, you have paid $5,000 for 100% ownership of the company.

Loans: These are amounts of cash you take from the bank or from someone else, to be re-payed at a later date.  I highly recommend you do not take loans in the first place, but if you really need them, here are three paths you can follow:

  • Friends and Family: Contrary to popular belief, this is an excellent path to follow, if you avoid certain pitfalls. Take loans from friends and family, and make sure you have plans to pay them. If you’re further interested in this topic,  read Investors In Your Backyard, an excellent book on the topic. If properly done, you strengthen your relationships with the people who believe in you, and you pay no interest fees at all.
  • Government-backed initiatives: Governments all over the world have loan programs for startups with very low or no interest fees. For example, Lebanese Central Bank has a program called Kafalat, which allows small and medium enterprises to access loans with no interest fees. Check if similar programs exist in your country, and whether your company is eligible. These programs have certain criteria for businesses to be accepted.
  • Business Bank Loans: This is my least preferred option. If you’re taking loans from the bank, you’ll have to pay a relatively high interest fee, so make sure you can make enough profit in order to repay the loan, and make a decent living along the way.

Sales: This is an estimation of the amount of money your sales will bring into your company. If you’re starting your first business, I suggest you go for lesser optimistic values. When I started my first business back in 2007, I thought that I would be selling four times more than I did actually did. However, if you really know the market, and have been working in it for a few years (employee, supplier…) , then you can go for whatever you think is reasonable; but again, go for the worst-case scenario. It’s about estimating the minimum number of sales, not what you would like to sell.

Outgoing Money

Costs of Sales: This number is about how much sales will cost you. For example, if you estimated that you will sell in your first month of business 100 products, you would include here the costs of selling those 100 products.

Payroll & Benefits: You would include here any salaries, insurance and other benefits you or your employees are getting.

Rent & Utilities: Office rental, Electricity bill, Internet…

Sales & Marketing Expenses: Cost of advertising, brochures, hiring a marketing expert…Any expense related to sales and marketing goes here.

Payment of Taxes: Include an estimation of the taxes you will be paying. Tax rates differ by country. Check where your business is incorporated

Debt Re-payments: If you’ve taken any loans, you would have to include here the repayment schedule. For example, if you took a loan of $10,000 , and you would want to repay $2,000 the first year, $3,000 the second, and $5,000 the third, you would include that too.

Purchase of Assets: Stuff that you need to purchase for your business; Computers, Software, Special Equipment, Office supplies…

How to estimate properly

For the first year, I would calculate incoming and outgoing money on a monthly basis, just to figure out how the money is moving. For the second and third year, I would estimate them on a yearly basis, because you already have an idea how the money flows.

Once you have the incoming and outgoing money, you would calculate them as follows for the first three years.

 Net Cash Flow = Total Incoming Money – Total Outgoing Money

where total incoming money is the sum of all incoming items in the chart above (green items), and outgoing money is the sum of all outgoing items in the same chart (red items).

There, once you have completed this list, you would have a result similar to the following:

First Year Net Cash Flow  = $50,000

Second Year Net Cash Flow – Year 1 = $75,000

Third Year Net Cash Flow – Year 1 = $95,000

Now, take a look at those numbers, do they make sense? Obviously, your numbers will be different. Is it really worth the effort? If yes, then congratulations, you’re ready to launch. If not, you will either need to go back through the whole steps, in order to figure out how to make adjustments, or find a new idea if those adjustments won’t work.

In my final article, I will take a look at tools which will simplify the process of creating business plans. We’re ready to launch, stay tuned.