Is Inventory an Expense? NO! Here is Why.

June 29, 2014 by Adam Hoeksema Leave a Comment

As the manager of a microloan program I review dozens of small business financials every month. One of the most common mistakes I see that really hurts a company’s chances of securing a microloan is when they categorize their inventory purchases as an expense.

When you purchase inventory, it is not an expense. Instead you are purchasing an asset. When you sell that inventory THEN it becomes an expense through the Cost of Goods Sold account.

So what happens when you categorize your inventory as an expense immediately?

You will understate your assets because your inventory won’t actually show up as inventory on the balance sheet.
You will overstate your expenses so it may look like you are not making a profit even though you actually are.

Both of these things will make it harder for you to get a loan. So make sure to get this small accounting issue correct before you apply for a loan or an investment.

Coffee Shop Financial Model Example

June 27, 2014 by Adam Hoeksema Leave a Comment

Thinking about starting a coffee shop? If so, you aren’t alone. There are 20,000 coffee shops in the U.S. according to First Research. The problem is that most startup coffee shops fail. If they don’t fail they tend to struggle along and just reach breakeven.

According to a March 2009 Seattle Times article, the average coffee shop has $150,000 to $500,000 in startup costs. So the common problem is that business owners are undercapitalized and start on day 1 with no cash in the bank. Before you invest a single dollar into starting your coffee shop you should create a set of financial projections.

In this blog post I am going to show you exactly how to create a set of projections for a startup coffee shop.

You might be interested in: Coffee Shop Financial Projection template

How to Project Sales for a Coffee Shop

The first thing you will need to figure out is some assumptions for how to project sales. Here are some sample assumptions that you will need to answer for your own unique situation:

Starting Number of Customers Per Day = 50
Number of Days Open Per Month = 26
% Monthly Growth Rate of Customers During Year 1 = 5%
% Monthly Growth Rate of Customers During Year 2 = 1%
% Monthly Growth Rate of Customers During Year 3 = 1%

Instead of trying to project how many lattes, coffees, muffins, bagels etc you will sell, it is much easier and probably just as accurate to just estimate the average purchase per customer visit and then estimate what your average cost would be for that order. Here are a couple of related assumptions:

Average Purchase per Customer Visit = $5
Average Cost of Goods Sold per Customer Visit = $2

Based on these assumptions I created sales and cost of goods sold projections using ProjectionHub. Here is a screenshot:

Coffee Shop Salaries

Next you will be asked about Salary Expenses. We already built in some wages for baristas through the labor costs section of Cost of Goods Sold. We assumed that on a $5 order there would be $1 of labor involved which goes to pay wages. These employees will also make a living off of tips.

So for the salaries section you might just have 2 salaries for 2 part time managers. Let’s assume you pay each one $15,000 per year since they are only part time. Let’s assume that the first manager starts in month 1, and the second manager starts in month 6 as sales start to pick up. During those first 6 months you as the owner may need to put in more hours. Here is a screenshot of the salaries module:

Next I entered in the monthly expenses that I would expect the shop to have like rent, utilities, supplies, insurance, accounting, and advertising.

Coffee Shop Startup Costs

Next we need to look at startup costs for the coffee shop. Again, as mentioned previously this can cost between $150,000 and $500,000. Here is what I budgeted for startup costs:

Build out of space = $50,000
Required starting cash balance = $30,000
Initial Inventory = $5,000
Equipment = $30,000
Furniture = $10,000

So this is a low end estimate at $125,000 in startup costs. Now I have to enter where I intend to get that $125,000 in funding. I split it up between a $75,000 bank loan and a $50,000 owner investment.

That just about wraps up your projections for a coffee shop. In the example I just created the shop just breaks even in year 1 and is profitable in year 3 with a net income of $27,000 on revenue of $160,000.

Step by Step: Creating Financial Projections for a Freemium SaaS Business Model

June 25, 2014 by Adam Hoeksema Leave a Comment

At ProjectionHub we are all about creating useful, powerful, and simple financial models for startups and small businesses. On June 1, 2014 we released a new industry specific model for SaaS businesses. We have been really surprised by the use of the model in the first 3 weeks. Over 23% of our new users since June 1 have opted to use the SaaS financial model.

Because of the popularity we thought it might be useful to write an extensive blog post/user guide for the new model. So the following guide is based on an example set of projections for ProjectionHub which is using a freemium SaaS business model.

SaaS Sales Projections

First we start with creating sales projections and entering in some base data to get started:

I added the current number of paid subscribers that we have which is 20 since we are only 3 weeks into this new business model. Next, I added our average monthly website traffic which was 2,700 based on Google Analytics data. Also based on Google Analytics we know that 19% of website visitors are signing up as free users.

Next we did some internal analysis of ProjectionHub and found that about 33% of signups actually return and complete projections, and they return over a period of 3 months on average, so we lose 33% of active users each month.

Next we know from our history that 5% of users that signup will end up purchasing a subscription. To get an idea of what a good free trial to paid subscription conversion rate is, check out this answer on Quora. Lastly, we are guessing that right now we are losing about 30% of our users each month. This is not good for a SaaS business model, but we have some new features that we believe will drastically cut our “churn” / cancellation rate. To get an idea of what a good cancellation rate is see this answer on Quora.

Revenue Per Free Active User

Next we can add revenue generated by non-subscribing/free users. On average we are generating about $1 per free registered user. We also add our monthly advertising spend through Google Adwords and our average cost per click of $1.75.

SaaS Subscription Levels

Next we are adding our 4 subscription membership levels. For each subscription level we add a price and then we add a percentage that will purchase monthly vs. annual subscriptions and then we add a percentage of subscribers that will buy at each of the 4 levels.

You can add as many subscription levels as you would like.

SaaS Expenses

Now that I have added the sales projections, it is time to add expense projections.

Cost of Goods Sold

For us, we have some 1 time cost of goods sold and monthly cost of goods sold. Since our customers pay with credit card we assume that we pay about 3% of sales for credit card processing fees. On the monthly cost of sales we have the following:

Hosting with Rackspace
Email Processing with MailChimp
Licensing costs with Quickbooks

Below is a screenshot of the Cost of Goods Sold entry page:

SaaS Salaries Expenses

Next we added 2 salaries to our projections. We added a starting month and ending month for both positions and a department. You can also add the number of those particular type of employees. So for example if you had a call center and needed to add 50 call center reps, you could add all 50 at once instead of each one individually.

General SaaS Expenses

Next you will need to add your general expenses which is pretty straight forward. Add your monthly projections for expenses like accounting, legal, travel, rent, utilities, etc.

Investment Projections

Next I added a $100,000 investment in month 1 and an additional $500,000 investment in month 12.

That basically completes our projections for ProjectionHub, although you can add a lot more detail if other things apply to your company. You can add additional assets and liabilities.

Financial Projection Graphs Included

Once we downloaded the Excel file from ProjectionHub we can view the various graphs along with the 3 years of financial statements. Here are some of the graphs included.

SaaS Financial Projection Excel Template

So if you don’t want to use our ProjectionHub app, you can download our SaaS projection template here.

A Powerful Financial Model for a Startup Gym

June 14, 2014 by Adam Hoeksema Leave a Comment

According to the 2018 Fitness Industry Analysis, there are 145 million members of health clubs around the globe, and the fitness centers that serve these members are estimated to have earned an industry total of $84 billion!

Are you ready to jump into this booming industry?

Before you invest your life savings, make sure you understand your gym financial projections and what it will take to benefit from your investment. The following blog post will walk gym owners through the process of creating financial projections using our web app, ProjectionHub.

General Business Info

Once you sign up and confirm your account you will be asked to complete some general business info as seen below:

Adding the Gym Business Model

Once you save the general business info, you will be able to add a business model. If you don’t already see a Gym Business Model added on this page, you can click the add Business Model button as seen below to add your first gym:

Revenue

Next you can click the orange button to Add Revenue to get started with your sales projections.

Our web application will create certain categories of revenue based on your business model; however, you will now have 2 options as you see in the image below:

You can click “Add Revenue” which will give you the ability to add projected revenue numbers for each month for your gym.
Or you can click “Add Google Sheet Revenue”. We have created a special Google Spreadsheet template specifically for fitness centers that will give you more control in terms of adding assumptions for your average membership price and number of members each month.
If you decide to utilize our Google Sheet template please see this guide on how to enable the Google Sheet Integration. You can see a screenshot of the Google Sheet below:

Expenses

Once you complete your revenue projections you can move on to your expenses. There are 2 primary types of expenses:

Startup Expenses
Ongoing Operating Expenses

Here is a list of potential startup costs when starting a gym based on information from Anytime Fitness:

Real Estate/Improvements
Equipment
Supplies/Furniture
Outside/Inside Signage
Advertising
etc.

As you know more about your specific costs you can update this list. Some of the items listed as startup expenses should be entered as expenses on month 1 and some are actually cash spent on assets like:

Leasehold improvements
Equipment
Buildings

If you have any of these types of expenses you will want to add them later as an “Asset” instead of an “Expense” on this page.

Operating Expenses

On the Expenses page in ProjectionHub you will be able to add/update your operating expenses. You will notice that the Expense page will come with a number of standard expense line items along with a default monthly expense for most of the line items. Obviously you can change any of these default expenses to reflect your specific situation.

Some expenses will be a % of your total sales, instead of a fixed monthly amount.

So as you see in the image above you can click the check boxes next to those expense categories and then in the drop down box you can select “Apply Industry Ratios” and then click “Apply”.

ProjectionHub is using a 15% of sales ratio for the personal training wages and a 3% of sales ratio for the credit card fees. So when you click “Apply Industry Ratios” the system will take your projected sales and multiply them by 15% to come up with your personal training wages for example.

Assets

Next you can move on to the assets section. You will notice that the Assets page comes pre-loaded with the default assets that you might have as a Subway franchise owner.

To add an asset, hover over the row, see the 3 dots on the left of the asset name, hover over, and click edit.

Next you will be able to add your Gym Equipment as an example. You can enter in the details of your assets as seen below:

Loans

Next you can move to the Liabilities page and add a loan. If you are going to borrow to help fund your startup costs, you can “Add a Liability” as seen below:

Then, you can insert the details of your loan/other liability:

Investors

Next you can add any personal investment you will be making as well as investment from outside investors. One common situation may be that you pay a franchise fee with your personal investment. In the example below we assume that you paid a $15,000 franchise fee as a personal investment, and we selected that the investment was pre-existing which means that the projections will assume that you already paid the $15k prior to the projections starting, so this will show up on your opening balance sheet as equity.

Reports

Once you enter in all of your assumptions you will be able to review a number of reports. Here is a sampling of some of the reports, tables below:

On the Dashboard page you will be able to download your projection Income Statement, Balance Sheet and Cash Flow projections to share with your lender or investor.

Adding Multiple Gyms

Finally, let’s assume you want to add another gym in the future. All you need to do is go back to the “Business Model” page and add another “Gym” business model. You can then label it Gym–Unit 2 and you can repeat the process. You can add as many units as you would like over time.

Again, you can get started by creating a ProjectionHub free trial account today.

As you complete your projections please don’t hesitate to reach out to us with questions at support@projectionhub.com

Good luck!

How to Make the Booth Rent Model Work for a Salon or Barber Shop

June 10, 2014 by Adam Hoeksema Leave a Comment

Many salons and barber shops are structured with a booth rent model, this can be a challenging business model, but it can work if you are diligent in modeling your financials to determine your breakeven point for the salon.

The following is a description of how you can create financial projections for a Salon or Barber Shop with a booth rent model using ProjectionHub.

Sales Projections

First, we are going to create sales projections for the Booth Rentals and then sales projections for the Product sales.

So I added Booth Rent as a product. You could also choose to add it as a service with a monthly sales cycle, but I chose product. So as you can see I set the price for booth rent at $400 per month, and I am assuming the salon has 10 booths. So in month 1 the salon will only start with 3 booths rented, but will add 1 renter each month until the salon reaches capacity in month 8.

Then for sales projections for Hair Care Product, rather than add every single product that the shop might carry, I am just going to make one projection for all hair care products. I am going to assume that the average sales price per unit is $15. In month 1 I am assuming that I will sell 20 units and then I added a 5% monthly growth rate for retail sales. So by month 12 I expect to sell 31 units.

Sell the Same Booth Twice?

Now after year 1, maybe I realize that 2 of the booths that are currently being rented are sitting empty most of the day. Maybe those two particular stylists only come in at night. So you decide to sell those booths twice, so now you only have 10 booths, but 12 renters as seen in the year 2 sales projections below:

Cost of Goods Sold for Barber Shop

The next screen that you will see on ProjectionHub will ask for your Cost of Goods Sold. For booth rent there will be no cost of goods sold. For the hair care product I am assuming an average cost to purchase the product of $4 per unit.

Booth Rental Salons may or may not have any employees to manage the salon. It is probably most likely that the owner just manages the salon.

Overhead Expenses

Now it is time to enter monthly overhead expenses for the salon. Here are the expenses I think are probably pretty common:

Accounting – $100/month
Advertising – $75/month
Insurance – $25/month
Office Supplies – $25/month
Telephone – $60/month
Internet – $40/month
Rent – $850/month
Utilities – $100/month
Website – $25/month
Owner Draw – $2,000/month (the owner needs to make something for the work and effort, but maybe won’t take an owner draw until month 8 when the salon reaches rental capacity.)

Startup Costs

Next we need to add the other 1 time startup costs and the sources of startup funding.

Let’s assume that you will want to purchase $3,000 worth of inventory to get started, you will need to purchase sinks, chairs etc for 10 booths which we will assumes costs $20,000 you will want $10,000 in cash in the bank, and will have $2,000 in additional one time startup costs like a sign, and legal fees.

Sources of Funding

Let’s assume you are going to try to get a loan for your startup to fund the $35,000 in startup cost and cash reserve requirements that you have. You might start by looking at this list of SBA Microlenders who specialize in making small loans. Let’s assume you are successful in securing a $30,000 microloan and you invest $5,000 of your own savings.

Finally, ProjectionHub will ask you how much inventory you expect to keep on hand as a percentage of your monthly sales. I am going to assume that you keep at least 1 month of inventory on hand at all times so you would enter 100% of monthly sales as your inventory level.

Now you are ready to download the file and take a look at your completed projections. Based on the info we entered, here are some of the graphs that ProjectionHub produces:

So, are you ready to create your own financial projections using ProjectionHub? Or would you simply prefer to download the Excel template here?

Should I Buy More Inventory or Risk Losing a Sale?

June 9, 2014 by Adam Hoeksema Leave a Comment

This is a challenge that every retail store that carries inventory that might be seasonal will have to face. You have one snow shovel left and it is already late winter. It isn’t likely that you will get any more significant snow, but it is possible. Over the last few months you have been selling 5 snow shovels or more every time it snows more than 4 inches. So the big question is this. Do you order more snow shovels? The smallest order you can make from your supplier is 10 units and they cost $10 from your supplier and you sell them for $20.

Now that we have the relevant numbers let’s do some math.

Estimate the Percentage Odds of Selling all 10 Shovels = 20%

Cost to Store Shovels Until Next Winter = $10

Cost of Capital (Interest Rate You Pay for a Business Loan) = 7%

So your most likely scenario is to sell 2 of the 10 shovels (20% x 10 shovels) which would give you $20 in profit. But then you would have 8 shovels left that you would have to store until next year which we are assuming costs $10. Then you should also take into account how much it cost to use the extra $80 to purchase those additional shovels. To do this you should take what % you might pay on a business loan to use that $80 that could have otherwise been used to pay down a loan balance. So let’s take $80 x 7% = $5.60. So between storage costs and interest costs you have spent $15.60 to make $20 in profit.

Lastly, you should consider what you could have used those funds for instead. If you didn’t buy the shovels you could have bought more garden shovels to prepare for Spring time. You could have recycled that money several times over to buy new inventory, sell it, and purchase more inventory again. You could have turned that $80 into $240 over the next 9 months.

So there is not perfect answer that fits all situations, but this is the process you should probably think through at some level when trying to determine whether or not to buy more inventory for your seasonal retail shop.

If you need to create a full set of financial projections, try our financial projection web application – ProjectionHub – for free here.

ProjectionHub Adds Graphs!

June 5, 2014 by Adam Hoeksema Leave a Comment

We are excited to announce today that we have added graphing capability for our ProjectionHub subscribers. Now subscribers will be able to download an Excel file complete with up to 3 years of monthly balance sheet, profit and loss and cash flow projections along with the following graphs:

ProjectionHub Graphs

Monthly Sales Forecasts
Annual Sales Forecasts
Annual Sales, Gross Margin, Net Profit Summary
Sources and Uses of Funding
Breakeven Analysis
Projected Cash Flow

Graphs will come standard with our normal download file for ProjectionHub Subscribers. Take a look at the new feature and let us know what you think!

How Large of a Business Loan Can You Expect to Secure?

June 3, 2014 by Adam Hoeksema Leave a Comment

As the Loan Program Manager at the Flagship Enterprise Center I often have the opportunity to be the first (non friends and family) lender for small businesses. Typically business owners that have not secured a business loan in the past have no idea what is a realistic loan request. The conversation usually goes like this:

Me: So how much do you think you are going to need in funding?

Entrepreneur: Well what is the largest microloan the Flagship can make?

Me: We can go up to $50,000, but our average loan size is around $13,000.

Entrepreneur: Perfect! I was thinking $50,000.

My guess is that most entrepreneurs who have not gone through the business loan process before end up asking for our maximum loan size right off the bat. Out of 100 microloans we have only made 1 loan of $50,000. The question that business owners need to know the answer to is what is a reasonable request? Let me attempt to give you some principles and rules of thumb that can help you request the right amount of a loan, and ultimately create realistic financial projections for your business.

Line of Credit = 10% to 15% of annual revenue – As a rule of thumb you are probably not going to get more than 10 to 15% of your annual revenue as a line of credit. So if you come in with revenues of $100,000 and ask for a line of credit up to $70,000 you are not going to find much success. A line of credit is meant to help you manage your cash flow cycle. So if your customers don’t pay for 30 or 45 days, that line of credit will help you fund the business during that month and a half, it should not be used to finance new long term projects.
Term Loan Not Greater than 25% of Annual Revenue – If you looking to secure a term loan to hire employees, purchase inventory, equipment, or make improvements to your facility, then you should expect 25% or less than your annual revenue. Anything larger, and you just won’t be likely to be able to afford the monthly payment.
Real Estate Loan = Up to 80% of the value of the real estate – Since real estate loans can be for 20 or 30 years, you can secure a much larger loan as a percent of your revenue simply because your monthly payment will be lower since it is stretched out over 30 years.

Hopefully this gives you some idea of what is a reasonable loan request for your small business or startup. Good luck!

Small Businesses – How Much Should You Pay Your Employees?

June 1, 2014 by Adam Hoeksema Leave a Comment

Small Business Owners – Ever wonder if you are paying your employees too much?

Employees – Ever wonder if you aren’t getting paid enough?

We have some interesting data that we pulled together based on financial projections from our over 6,500 users who have created financial projections using ProjectionHub.

We have users add salaried positions by department. Today I want to share the average salary for 3 departments. Keep in mind that 2/3rds of our users are startups and the remaining 1/3rd are primarily small businesses.

Here is what we found, our users project to pay their employees the following:

Research and Development – $53,131
General and Admin – $49,632
Sales and Marketing – $38,389

The order did not surprise me at all. R&D tends to include programmers, developers, and technical employees. This is not a surprise that this department leads the pack in terms of average salary.

Sales and Marketing is likely at the bottom because many companies pay a small base salary for sales people and then pay them on a commission basis. This probably explains the lower salary range for sales and marketing.

What do you think? Are these salaries in line with what you pay or receive? Let us know by connecting with us on Twitter.

Are You Likely to Raise Capital or Not? We Can Predict Your Chances of Success

May 30, 2014 by Adam Hoeksema Leave a Comment

This is our latest and greatest idea!

Co-Founder of ProjectionHub, Brandon Hoeksema, is an artificial intelligence/big data guy, and we came across the thought the other day that we could probably predict your chances of success in raising capital with a high degree of certainty based on your financial projections.

How?

Let me explain. We currently have over 6,500 users who have created financial projections using ProjectionHub, and we are growing fast. These users have projected that they will raise capital through loans or investments in the future, so here is what we plan to do.

Let’s say you project that you will raise $100k in investment in month 6. So 7 months after you create projections on ProjectionHub we are going to email you and ask 2 questions:

1. Did you successfully raise the $100k that you projected you would last month?

2. If not, did you raise any at all and how much?

These 2 questions will allow us to determine what characteristics in a set of financial projections make you most likely to successfully raise capital. Ultimately we think we can predict your chances of success in raising capital and tell you why you are unlikely to raise capital and how to improve your chances.

What do you think? Sound like a doable project? Sound like a powerful tool for entrepreneurs? We think so! This is definitely on our development list for the summer.

Let us know what you think on Twitter.

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