by Lisa Shaw Part 4 of 6 Published July 7, 1997 other columns by Lisa Shaw		When it comes to the financial end of running a business, you may wonder why you can't just run your business and be content to allow the financial end to take care of itself. Here's why: If all you do is deposit checks and credit card receipts and write checks to pay your bills, you may never know if you're earning a profit or not. This can lead to your business first stumbling, and then going down the tubes without you ever knowing the reason why. Start doing your financial homework by asking yourself the following questions before you quit your job to start your business. How much money have you budgeted to pay your living expenses during the launch of your business, and afterwards? Do you think of yourself as a risk taker? If you had to suddenly get used to living at a level one-third to one-half of what you're used to, could you do it if it meant you were working for yourself? With your loss of salary and job title comes a loss of status. Do you see it as a threat if you don't have a job that you and others can identify with? What will your immediate family think? Will your decision to accept a lower salary put a crimp in any of their plans? Profit and Loss One important way to gauge how your business is doing is to calculate a profit and loss statement. Even though money may be coming in regularly through revenue from your business, it may be possible that you are actually losing money because your expenses exceed your income. To figure out a profit and loss statement, first calculate the revenues that you expect to generate each week, month, and/or year. Say your average sale is $54, and you project that you'll make 300 sales in your first year. Your total gross revenue is $16,200.
Your profit and loss statement is a constant reminder of how well your experiment is doing.		Next comes your expenses. List all of the operating costs connected with running your business, including postage, phone bills, stationery, rent and utilities, and add up all of your expenses for the year. After deducting your expenses from your revenue, you'll be left with a pretax profit or loss. There's one more step, though. Now deduct all of the taxes you pay in connection with your business, and you will come up with your actual net profit or loss, which probably seems a long way from your initial gross revenue figure. Though you'll always have certain fixed expenses, there are a variety of ways you can adjust your profit and loss statement: cutting your expenses, discounting or raising the price you charge for your products and services, and increasing your marketing efforts. Over time, you'll see what attracts new customers and what keeps old customers coming back. You'll also see that running a business is a constant experiment; your profit and loss statement is merely a constant reminder of how well your experiment is doing. Cash Flow Cash flow is defined as the pattern of movement of cash in and out of a business: revenue and expenses. If you apply for a loan with a bank or other financial company after your business is up and running, you'll have to provide an analysis of your cash flow; if you're just starting out, you may be required to provide the loan officer with a projected cash flow statement. The first step to improving your cash flow is to increase your business year-round. But the effects from this aren't always that immediate, and there are things you can do to even out your cash flow a little more. Tying in with your own cash flow projections, you might want to conduct special promotions designed to pull in more business during those times of the year when your cash flow needs boosting the most. For instance, you should plan to mail promotional offers to past customers in your slow months. Borrowing Money The issue of borrowing money in these credit-weary days is apt to be a sticky one among entrepreneurs. "I'm in enough debt already," you may say, "Why would I want to borrow any more?"
WEB RESOURCE: U.S. Small Business Administration Online A terrific resource with information about the Small Business Act, tips on starting and financing your business, local resources, and much more.		But sometimes your cash flow won't keep up with your expenses. Even if you and/or a partner holds down a steady job, trust me when I say there will be times when even that won't be enough. Operating a business with all of the expenses that continue steadily from month to month will eat up huge amounts of cash, and during those times, it may be necessary to borrow money. You can approach a bank for a loan, the local branch of the Small Business Administration, a finance company, and friends and family. Or you can turn to plastic. Many entrepreneurs tap into their credit cards to initially finance their business, and then go back to them when things are slow. At anywhere from a 12 to 21% annual rate of interest, this is definitely an expensive way to borrow money. If you don't want to go this route — or get turned down by the bank or your friends — you can do it the old-fashioned way, and save for a rainy day. When business is booming and revenue is strong, set aside a certain percentage — some say 20% of every check that comes in — and sock it away in an interest-bearing savings account. Don't invest it in a place where you don't have instant access to your funds. A money market fund is best; the interest rates tends to be a little higher than a passbook savings account, and you have immediate access to your money. Lisa Shaw has been minding her own business for 16 years. Shaw is the author of more than 20 books on business, travel, and cats; she is also the owner of Litterature, a company that produces greeting cards and gifts for cats and dogs. © 1997 Lisa Shaw. All Rights Reserved.