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A weekly look at Wyoming business questions from the Wyoming Small Business Development Center (WSBDC), part of WyomingEntrepreneur.Biz, a collection of business assistance programs at the University of Wyoming.
By Bruce Morse, WSBDC Region 2 director
"I applied for a business loan and my banker asked me to provide a projection of expenses or cash flow. What is the best way to do this?" Brad, Afton
If you are an existing business, use your historical financial information to project what the next 12 to 24 months will be. Include the debt service on the new loan being applied for; any new sales or revenue that investment will create; and what might go away (for instance, rent, if you are buying your own building versus leasing).
The purpose is to demonstrate that you understand how your income and expenses will flow in and out (cash flow), and that you can repay the amount borrowed. Include some margin for error since nobody ever projects perfectly.
If just starting a new business, this is a little trickier. Estimating the expense side is usually easier than the revenue. You can negotiate rent and, among other items, find out what utilities cost, price insurance and also set a marketing budget.
Sales are another matter. How many people will buy your product or take advantage of the service really depends on what it is; the competition; how much marketing you plan to do or can afford to do; and a whole host of other factors.
Since you will have some of your hard-earned money and time invested in the deal as well, you want this estimate to be as accurate as possible and not enter into this venture only to have it fail. Remember to account for how much, if any, money you need to generate from this business to sustain your lifestyle. If you have personal bills and living expenses that must be paid, that needs to be factored.
I usually recommend to my clients that they generate projections for at least two years (some lenders will want three). Wyoming Entrepreneur has a good template on its website (www.wyen.biz) under the "Start a Business" tab. A loan calculator is included to assist in determining what new debt will cost you. This template generally satisfies the format a lender wants to see.
Remember, it usually takes more money and more time than you think to get the business to the point where it is operating at a profit on a monthly basis. Be especially careful with highly seasonal businesses and recognize that, when you start, can make or break the deal.
For assistance in developing these projections, contact a local Wyoming Small Business Development Center office in your area, or call 1-800-348-5194.
A blog version of this article and an opportunity to post comments is available at http://www.wyomingentrepreneur.typepad.com/blog/.
The WSBDC is a partnership of the U.S. Small Business Administration, the Wyoming Business Council and the University of Wyoming. To ask a question, call 1-800-348-5194, email email@example.com or write 1000 E. University Ave., Dept. 3922, Laramie, WY, 82071-3922.