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The aim of any business is to derive profit. But the other side of profit may be loss. Profit is the return on investment and the reward for taking risk in starting your own business. In order to make equilibrium between profit and loss it is necessary to develop financial plan. Firstly, it is necessary to estimate: 1) start – up expenses (onetime cost); 2) operating expenses (profit and loss); 3) cash flow; 4) break – even point; 5) the value of ownership equity.
Estimating onetime start – up costs should include:
Licenses and permits
Decorating and remodeling
Fixtures (cases, lighting, etc)
Equipment (including office equipment)
Machinery
Installation fees
Lease deposits
Utility deposits (electricity, phone, heat)
Starting inventory
Legal fees, accounting fees
Grand opening advertising and promotion
Operating cash
Reserve for unexpected costs
Other (various items)
Total
Operating expenses are the everyday costs of running business. They may fluctuate but there are fixed costs including such items as rent, insurance, basic advertising, heat and light, property taxes, licence fees. Thus, operating expenses should be stated in the following way:
Wages, salaries, benefits
Rent for premises
Taxes and licenses
Advertising
Insurance
Telephone
Heat
Utilities: gas, electricity, sewer, water-supply
Maintenance, trash removal
Delivery transportation
Supplies
Legal and accounting fees
Dues: subscriptions
Travel and entertainment
Office supplies, postage
A cash flow planning allows to forecast the actual cash flow into and out of the business over a given period. Cash flow may be affected by start – up costs. Cash flow projection should include the following:
cash in bank (start of month)
small cash
total cash
expected cash sales
expected collections
total receipts
total cash and receipts
all disbursements
cash balance at end of month
Beside minding your cash flow it is necessary to calculate break – even point, the efficiency of the business. By calculating break – even point you need to bear in mind that there are fixed and variable costs. The former do not change as your business volume increases or decreases (rent, salaries, utilities during vacation, leaves and so on).Variable costs are changeable (shipping and delivery expenses, selling increase or decrease). Thus, break – even point may be calculated by mathematical formula:
| BE = | PC | |
 ,
| ||
| SP – VC |
where BE is break – even point in units of products;
PC is total fixed costs;
SP is selling price of one unit;
VC is total variable costs.
The last stage of the business plan is the value of ownership equity. The owner's equity consists of assets (the property of the business) and liabilities (debts). For calculation of your equity it is necessary to prepare a balance sheet:
| Left: Assets (current assets:) | Right: Liabilities (current liabilities) |
| Cash in bank Petty cash Accounts receivable Merchandise inventories | Accounts payable Payroll taxes Sales taxes |
| Fixed assets | Long term liabilities |
| Land Building Delivery equipment Furniture and fixtures Depreciation Leaseholding Total fixed assets | Capital Proprietor's capital Net profit for the period Increase in capital Total capital end of period Total liabilities and capital |
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