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will survive an initial cost overrun.

      Cash to Provide Liquidity

      Your next most important need for cash once you have covered your start-up expenses is to cover any projected shortfalls of cash before your practice becomes profitable. For example, if you are expecting a shortfall of $450, $295, and $75, respectively, in the first three months, you will need $820 in financing to cover that shortfall.

      Many small-business owners who don’t spend time forecasting their profits end up having to cover the shortfall in inappropriate ways, such as running up balances on credit cards.

      Let’s look at an example of how you would predict your revenues and expenses for your first year of operations. There are several important things to note as you prepare your own cash-flow projection.

      • Keep in mind the difference between cash flows and revenue and expenses. Cash flow refers to the actual inflows and outflows of cash, whereas revenue and expenses (as reported on the income statement) can reflect items where the cash transaction hasn’t yet occurred. For example, if you sell an item today but your customer won’t pay you for 30 days, this will show up on an income statement as a revenue item, but would not show up in a cash-flow report because you haven’t yet received the money. The cash-flow projection deals only with actual inflows and outflows of money. Its purpose is to make sure that you don’t run out of money. For a fuller discussion of cash flows versus income and expenses, you may wish to refer to Financial Management 101, also published by Self-Counsel Press.

      • The “Cash receipts” line reflects your estimate of the actual receipt of accounts receivable, not your revenue projections. For example, you may collect only 15 percent of your revenues in the month of sale, 63 percent the following month, 18 percent in two months, and 4 percent in three months. As you get more historical data for your business, you will be able to understand your revenue collection patterns more clearly. If you are reporting $1,250 in sales for the month of January, your cash-flow report would only show cash receipts of $187.50. Make sure when you are preparing your cash-flow projection that you take into consideration the average length of time it will take to collect your receivables.

      • All cash receipts and cash payments appear on the cash-flow projection, regardless of their source. There can be a line for the purchase of capital equipment. This item would not be recorded on the income statement (it is a balance sheet item), but it is a payment of cash. Any projected purchases such as equipment or inventory should be included in your projection. The same would be true of proceeds from a new loan. If the bank lends you $25,000, it would show as a receipt of cash on the cash-flow report.

      • If the closing cash balance on the cash-flow projection falls below zero at the end of any month, you will have to consider how to finance the shortfall. It is okay to have a net cash outflow in any particular month (as in the month of April in the example) as long as there is a cumulative cash surplus going into the month. This would roughly translate to a positive projected balance in the business bank account, which would be able to absorb any shortfall up to that balance. It is only when the cumulative balance drops below zero (i.e., you have no money in the bank account) that you have to have other financing in place.

      Once you have determined how much financing you will need for your bookkeeping business, it’s time to make sure that your personal finances are in good order before you approach lenders and investors.

      Get Your Personal Finances in Order

      As much as you’d like to separate your business from your personal finances (and it is certainly wise to do so), banks and other lenders will be keenly interested in your personal financial situation, especially if you are starting your bookkeeping business from scratch.

      If you are buying an existing business, the bank will be able to look at historical financial statements for the business to assess its profitability and viability. With a start-up business, however, lenders generally need further assurance that they will get paid back. From their perspective, if your personal credit history is a mess, it’s more than likely that you will end up making your business’s credit history the same way. Your personal financial situation may end up crippling your business’s ability to attract investment capital.

      From your own perspective, if your personal financial life is a mess, you will have even less time to clean it up after you’ve started your business than you do now. Considering your personal financial well-being and integrating it with your business goals will help you to look at your entire financial situation more rationally and holistically.

      Here are some issues to consider when straightening up your personal finances.

      Credit History

      There are three major credit bureaus in the United States and two in Canada. If you have ever borrowed money (even to arrange a mortgage), you will most likely have a file with these agencies. Lenders report credit history to the bureaus and use the accumulated information to make credit decisions about people and companies. The report will include your current and past borrowings, any late payments, your employment history, and any bankruptcies or other financial judgments against you.

      All of this information is distilled into a credit score, which lenders then use to assess how risky you are to them. You should review your credit history at least annually to ensure that it is accurate and that you know what it includes. Any inaccuracies should be corrected as soon as possible, as the corrections may take a few months to show up. Each credit bureau has its own procedure to investigate and correct errors.

      In the United States, the three national credit reporting agencies for individuals are —

      • Equifax, www.equifax.com,

      • Experian, www.experiangroup.com, and

      • TransUnion, www.transunion.com.

      In Canada, the two reporting agencies are —

      • Equifax, www.equifax.com/EFX_Canada, and

      • TransUnion, www.transunion.ca.

      Debt Management

      Besides your credit history, lenders will also be interested in the level of personal debt you’re carrying. More debt makes you a higher risk. From your own perspective, it’s wise to review your debt agreements and interest rates to make sure you’re paying the least amount of interest possible and also that you have a plan to pay down your debt. This plan has to agree with the amount of earnings you plan to take out of your business.

      Take the following steps to minimize your debt and interest payments:

      (1) Record your debts. List all of your personal debts, the terms left on them, and the interest rate(s).

      (2) Rank your debts by highest to lowest interest rates. You will find that the highest interest rate debts are generally credit cards, retail cards, rent-to-own situations, and payday loans. The more the debt is secured by underlying assets, the lower the rate will be. For example, because the bank can take back your home if you do not make the mortgage payments, mortgage rates tend to be lower — because the risk to the bank (not to you!) is lower.

      (3) Review your budget. Based on this review, calculate how much you can set aside for debt repayment.

      (4) Make a formal debt repayment plan. For each debt, you should know how long it will take to pay off (not just the minimum payments required by the lender). Start with the debts with the highest interest rate and pay them off as quickly as possible.

      (5) Stick to a budget! Make sure you make the payments you have calculated every month in order to be out of debt when you have planned to be. Setting personal budgets and cash-flow projections is every bit as important as setting business goals.

      Retirement Goals

      It’s important for every person

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