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ProjectionHub

ProjectionHub Introduces Custom Expenses

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We are excited to release our new custom expense feature for our ProjectionHub users.  For the last 6 months users have only been able to enter general expenses for the categories that we had provided.  We knew this was limiting to users, so we released a new update that now allows you to create custom expenses.

How to Know if I Have Enough Cash to Start a Business?

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This is a common question that thousands of hopeful entrepreneurs have every day.  You want to start a business.  You are considering leaving your day job, but you just can’t pull the trigger, you just aren’t sure if you have enough saved up to make it work.  You might consider a transition period where you keep your day job, or work part time, and start your business in your spare time.  The key to understanding this question is a robust set of financial projections that provides a realistic outlook for your transition from day job to full time entrepreneur.  Here are 3 key things you need to consider in order to understand if you have enough cash to start a business:

1.  Only 16% of Entrepreneurs Take a Paycheck in Year 1 – Based on some in house data we gathered here at ProjectionHub, we found that only 16% of entrepreneurs were projecting to pay themselves during the first 12 months.  The average owner’s draw for those 16% was as follows for the first 3 years:

  • Year 1 – $2,389 per month

  • Year 2 – $2,670 per month

  • Year 3 – $2,866 per month

So the first question is do your financial projections support you taking a salary from the business during the first year?  If so, is $2,300 enough?  Be sure that you are generating enough positive cash flow to pay yourself.  If not, then you need to plan on keeping your day job.

2.  How Long Will it Take to Receive Payment for Your First Sale – The next, really important question you need to answer is how long will it take you to get paid?  It could take you months to close on your first sale, but once you get the sale you aren’t in the clear yet, it could take another 90 days to get paid for that sale.  Startups don’t typically have a lot of leverage on their terms.  If you sell to a large company, they may take advantage of the fact that you are relatively desperate for the sale, and may not pay for 2 or 3 months.  This can be a death sentence for a startup.  So what is the solution?  Simply plan for it.  Plan to not get paid for months, and stress test your startup.  Can you survive if you don’t get paid for 90 days?  If not, you may not be ready to make the jump into entrepreneurship.

3.  You Can’t Get a Loan for 2 Years – Lastly, as a startup you probably won’t be able to get a loan for at least the first 2 years unless you have a great credit score and some personal assets. (You can check to see which lenders might lend to you at our partner Lendio).  My point is that you can’t rely on getting a loan during the first two years for your financial projections to work.  If you can’t survive at least two years without getting a loan for the business, then you simply aren’t ready to jump into a business full time yet.   

If you are looking to start a business and leave your day job, take some time to create a set of financial projections for free on ProjectionHub, and if you have any questions about making the jump to full time entrepreneurship, please don’t hesitate to reach out to me at adam@projectionhub.com.

ProjectionHub Partners with CDFIs to Help Entrepreneurs Create Financial Projections

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ProjectionHub is excited to announce a new opportunity for Community Development Financial Institutions across the country.  Over the last 6 months we have been working with a select few small business lenders to help us develop our financial projection tool – ProjectionHub which is a web app that helps entrepreneurs create financial projections without Excel.  Current partners include:

We are now opening our tool up to all CDFIs who would like to make ProjectionHub available for free to their clients.  To date, over 1,400 entrepreneurs have used ProjectionHub to create a full set of 3 year financial projections which includes:

  • Balance Sheet
  • Income Statement
  • Cash Flow Projection

CDFIs that would like to take the tool for a test drive can use coupon code “demo123” and get started here.

If you think this might be a helpful alternative to the complex and confusing spreadsheet templates that most organizations use to create projections, then simply fill out the form below for your CDFI and we will create a custom coupon code for you and all of your clients to use for free.

Partner With Us

Get a Business Loan BEFORE You Spend All Your Cash

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It happens all the time.  A business owner neglects their financial projections before they start a business, they think they have plenty of savings to get the business started, but after spending every last dollar from their savings account, they need a bit more and they apply for a business loan.

The Result?

They will undoubtedly be Denied.

Wise entrepreneurs will leverage their cash to secure a business loan long before they need it.  Banks are not in the business of handing over a pile of cash to individuals who have no cash, or assets to pledge as collateral, but if you have cash on hand there are plenty of lenders who would be willing to provide at least a small loan.

Typically the experts say that it will take you twice as long and twice as much money as you expected to start your business.  We have been collecting some interesting data here at ProjectionHub and noticed that only 16% of startup business owners are taking a paycheck from the business in the first year.  This means that you not only need to worry about the expenses of the business, you need to consider your personal expenses as well during the first 2 critical years.

Receivables are Not the Same as Cash

Here is the typical situation that I have observed.  Business owners will invest cash reserves into their business in order to generate sales, they get the sale, but then they have to fulfill the sale.  They hire people, complete the service and then bill the client.  Here is the problem, you have to pay your employees, your suppliers, your rent, your utilities, etc, etc, but your client might not pay you for 60+ days.  Many first time entrepreneurs are not expecting or planning for this situation, so they start the business under-capitalized.

It is a death sentence.

You might think that you will be able to get a loan based on your receivables right?  Your customer owes you $50,000, someone should be willing to provide at least $45,000 now based on those receivables, so that you can pay your employees and suppliers right?  The problem is that lenders typically look negatively upon business owners that let themselves get into this situation in the first place.  They think you should have done a better job at planning, and secured the funds before you spent every last penny.

You simply must secure a loan or investment before you use your savings.

ProjectionHub Partners with Lendio to Help Small Businesses Find the Right Loan

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We are really excited to announce a new partnership with Lendio to help ProjectionHub users find the perfect loan to fund the growth of their small business.  So here is how it works:

Step #1 – Users Add a Loan on ProjectionHub

Approximately 36% of ProjectionHub users forecast that they will need a loan at some point within the first 12 months.  So you just need to add a new loan like this:

Step #2 – ProjectionHub Recommends Lendio if it is a Good Fit

Next, ProjectionHub will determine whether or not your projected loan is a good fit for the lenders on Lendio.  If the tool deems that it is a good fit, it will recommend Lendio.

Step #3 – Users Complete Registration Process on Lendio

Finally, you will need to take 5 minutes and fill out a profile on our partner page on Lendio.  Then Lendio will match you with the perfect lender for your business.

This is really exciting for our team as we look to add additional value for our clients.  Please check out the updates, and find your perfect lender today!

5 Interesting Stats About Startups

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Approximately 75% of our users at ProjectionHub are startups, so we wanted to take a closer look at our startups and see if we could learn anything that would be helpful for other startups.  Here are 5 interesting stats that we uncovered.

1.  Only 16% of Business Owners are Taking a Paycheck from the Company in the First Year

I thought this was important for future entrepreneurs to know.  If you are going to start a business, you can’t expect to pay yourself during the first year.  If you need a paycheck each month at this point in your life, then you probably shouldn’t risk starting a new business right now.

The average monthly take home for the 16% of business owners who did take a paycheck was as follows:

  • Year 1 – $2,389 per month
  • Year 2 – $2,670 per month
  • Year 3 – $2,866 per month

2.  94% of Startups Are Looking for Funding

I was surprised to see how few people were planning to bootstrap their startup.  A whopping 94% of our users were looking for either a loan, an investment or both.  I doubt this data would hold across all startups, as I am sure that many bootstrapping startups are not creating financial projections, but nevertheless this is an interesting bit of data.

  • 58% of users are seeking investment
  • 36% of users are seeking a loan
  • The average projected investment is $342,000
  • The average projected loan is $153,000 at 8.7% for 64 months

3.  It Takes Service Companies 1 Week Longer to Get Paid Than Product Companies

Cash flow is king for a startup, so it is vitally important to understand how long you will have to wait to get paid by your customers.  Surprisingly our service based startups estimate that it will take 33 days to get paid by their customers, while it will only take 27 days to get paid for the average product based startup.

This is certainly something to keep in mind as you project cash flows for your startup.  How will you survive those 33 days while you are waiting to get paid?

4.  The Average Billable Hour Rate for Service Company Startups is $111 per Hour

This stat is across the entire service industry, so I am not sure how helpful this is on its own, but we also know that the average wage per hour paid to employees of these service companies is $29.50.  That means the average labor cost for a service startup is 27%.  If your labor costs are over 50% now you know that you are way out of line.  You probably need to increase your pricing, or decrease your labor costs.

5.  27% of Startups are Offering Both Products and Services

Finally, I thought it was interesting to note that 27% of startups are offering products and services.  Our data showed that 32% of startups are service only while 41% are product only.

Hopefully these stats can be helpful as you consider jumping into entrepreneurship yourself, or as you launch and grow your own startup.

About the Author:  Adam Hoeksema is the Co-Founder of ProjectionHub which is a web application that helps entrepreneurs create financial projections without the need to have a PhD in spreadsheet modeling.

Why Your Local Bank Is Not an Alternative to Factoring Receivables

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I work with many small businesses who use factoring as a way to finance their business.  The problem is that this is incredibly expensive for a business when compared to a line of credit or operating loan from a traditional bank.

First of all, what exactly is factoring?

According to Wikipedia,

“Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount.”

Factoring Receivables Example

So as an example, let’s imagine you sell plastic straws to McDonalds for their soft drinks.  You might have a $100,000 order, but McDonalds won’t pay for 90 days.  In the meantime you need to pay for raw materials in 30 days, and pay employees, pay your utility bill, pay rent, etc, etc.

So you can’t wait 90 days to receive payment for the order, but McDonald’s is a credit worthy company, so a Factor might be willing to give you $97,000 today for the right to collect the $100,000 from McDonald’s in 90 days.

Obviously this is not a cheap way to go when you do the math.  If you are paying $3,000 for 90 days, you would pay $12,000 over a 12 month period.  To keep things simple, let’s just say that is 12% interest you are paying which is at least twice as much as  you would likely pay on a line of credit from a traditional bank.

Why Bankers Don’t Like Companies that Factor

From what I have observed as a microlenders, bankers simply don’t like companies that factor.  I have always struggled to understand why they see this as a negative.  I, on the other hand, am of the opinion that if you can survive while you are factoring paying a very high interest rate for access to cash, then you should be able to thrive if you had access to cheaper money.  What you save on factoring fees goes straight to the bottom line, so why don’t bankers see it the same way?  I have a couple of ideas:

1.  Bankers are Financing Snobs – Sometimes bankers don’t understand that small business owners just do what they can to survive.  Sometimes traditional loans just aren’t available, so factoring becomes the best option for the business.  Bankers look at factoring as lower class financing, but I see it as a stepping stone.  You should not use factoring forever, you should use it as a tool until you are able to secure a traditional loan.

2.  Bankers Think Factoring is Poor Management – It seems like bankers think you must be a terrible manager of the business if you use factoring.  Again, this may be required during a stage of life for your business, it doesn’t mean you are a poor manager.

3.  Bankers Feel That Factoring is a Sign of Weakness – Banks seem to look at factoring as a sign of weakness.  They think if you have to resort to factoring, you must be weak.  I think it shows the business is actually strong because you can survive even though you are paying huge financing costs.

Alternative Financing Options

So what are your options if a traditional bank won’t fund you because you are factoring?

1.  First I would recommend one of our partners Lendio.  Lendio is loan matchmaker.  They ask you a few questions about your business, how much funding you need, and what you would use it for, and then they match you with lenders that are best suited for your loan request.  Maybe a traditional bank isn’t the best way to go.  Maybe you should give Lendio a try.

2.  If Lendio is not an option I would make sure that you are getting the best possible deal from your factoring company.

Unfortunately, you may not be ready to get those low interest rate lines of credit from traditional bankers, but my hope is that this article helps make life just a little bit easier for you.

 

How to Determine How Large Your Loan Request Should Be

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So your business is growing quickly and you think you are going to need a loan, but you don’t know how much to ask for?  This is a common problem, and there is no simple answer that I can give you.  Rather I can explain the process that I would recommend that you take when you are coming up with a loan request amount.

1.  Create a Sales and Expense Forecast

First you have to develop a set of financial projections (of course, I recommend ProjectionHub).  If you have past financial statements then you can develop your forecast based on the past, but if you are a startup you are going to need to create your projections from scratch.  Just a couple tips:

  • Use as much data as you can find to come up with projections
  • Project from the bottom up
  • Develop realistic assumptions to build your forecast

2.  Analyze Cash Flow Projections

Once you have completed your initial forecast, you can download your projected statement of cash flows and take a close look at your cash balance.  If you downloaded your projections from ProjectionHub, then you are looking for the top line cash balance for each month

As you can see in month 6 you hit a negative cash balance, and then in month seven you hit a low point of negative $15,000 in cash.

3.  How Much Should You Borrow?

So you are projecting a negative cash balance of $15k, you might think it makes sense to request a $15,000 loan.  I disagree.

You need to leave some room for error.  Your potential lender will only want to make a loan if they can see that you have some wiggle room.  Reaching a zero cash balance won’t do it.  My suggestion is that you try to keep at least 1 month of expenses in cash at all times.  So if you spend $12,000 in expenses each month, then I would suggest you keep at least $12k in cash at all times.  So in this example I would suggest a loan request of $27,000.

4.  Where to Get a Business Loan?

So now the only question is where to get a loan.  At ProjectionHub we recently partnered with Lendio to help match our financial projection tool users with the right lender.  Lendio is kind of like eHarmony for business loans.  They ask you a few questions about your business and your loan request and then match you with the perfect lenders for you, and it is free!

You can find your perfect lender now on Lendio.

At the end of the day there is now perfect formula for determining the perfect loan request, but I think building a realistic set of financials, analyzing your cash balance and then leaving yourself at least 1 month of wiggle room will get you really close to what you need.

ProjectionHub Partners with LaunchRock to Help Startups Make Financial Forecasting Easy

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The ProjectionHub team is excited to announce a new partnership with LaunchRock.  Our financial projection web application is now included in the LaunchRock App Store, and will be made available at a discount for all LaunchRock users.  

According to CrunchBase, LaunchRock allows users to create a “Launching Soon” landing page in minutes.  Thousands of startup companies use LaunchRock to collect interest, increase sharing, and build an audience for their startup before they officially launch the business.  They help you incentivize and reward your visitors for telling others about your project through email and social networks.

“This is an incredibly important partnership for us” said Adam Hoeksema, Co-Founder of ProjectionHub.  “LaunchRock will allow us to get our application in front of thousands of startup businesses each year.  We hope that our tool will help these startups create more accurate and realistic financial projections as they look to raise capital from friends and family, lenders, and investors.”

ProjectionHub is a web application that helps entrepreneurs create financial projections without the need to have a PhD in spreadsheet modeling.  Users complete their projections online and then download a complete set of up to 3 year financial projections as an Excel file.