Many entrepreneurs want to grow or expand their business. While almost all know where they want to go, few truly know how much capital investment is required to get there.
This is why finding your financial gap is so important. Let’s walk through the process of finding and filling your financial gap.
PART 1: DEVELOP A CASH FLOW FORECAST
Start with a base line of current activity. A trailing 12 month review is a common way to see the seasonality of your business model and help plan for the future. Once you have the past 12 months laid out, you can project this into the future using a few assumptions in your plan.
Example: Opening a second location
If you’re ready to expand in the next year you’ll want to budget your normal operating expenses (rent & utilities, personnel, advertising, etc.). But you’ll also need to budget for upfront expenses associated with the expansion (construction/build out, security deposits, initial inventory stock etc.).
While the expansion should ultimately result in increased sales, you may experience a period of little to no revenue as you go through construction. You should also consider sales will probably start off slower in the beginning months as you work on marketing to attract new customers to your store. You will need to quantify this in your sales forecast to best predict your true financial need.
Keep in mind that your revenue and expenses should be interconnected. For instance, if you are going to increase your projected revenue you need to have a plan to accomplish this, additional advertising or longer operating hours may be an option, but be sure to include the increased expenses related to this in order to have an accurate financial forecast.
PART 2: IDENTIFY YOUR STARTING POINT
Once you have your cash flow forecast together, you will want to add your current cash balance as a starting point. You will add (or subtract) the projected cash flow from month to month which will allow you to see when your cash may run out, or get below a comfortable amount in reserves.
This number is your financial gap.
Many companies will use personal capital or loan proceeds to fill this gap and get them on their way to achieving their goals.
By using a loan, you will want to include both the initial cash infusion as cash in, as well as the payments which will begin after the loan is made. Ideally your business will generate enough cash to cover the operating expenses and additional loan payment. If not you will need to either increase your projected revenue or decrease your projected expenses.