How to Know When You Can Afford to Hire a New Employee

February 21, 2016 by Adam Hoeksema Leave a Comment

Now Hiring Business owners have to make difficult decisions every day, many of these decisions have financial implications and can impact not only the bottom line of a business, but also the livelihood of families. Knowing when you are able to financially afford a new employee is one of those tough questions.

This can be such a tough decision because for many types of employees the expense is a big jump, it is hard to ease into hiring a new employee. For some positions you might be able to start part time and add hours over time, but depending on your trade, this may not be possible. In order to get good employees you might need to commit to full time employment right away.

Here are a few tips to help determine if now is the time to hire a new employee:

Do you already have the work? If you already are working over time and know you can keep a new employee busy, great! But if you are hoping to grow into this new position, it might be a good idea to work extra hard for a period of time so that you have some built in work and revenue to cover the cost of the new employee.
Are wages the only cost involved? Are you going to need to buy equipment for this new employee? Maybe a computer, desk, chair, phone, etc? Or if you are in a service business, maybe the new employee needs a work van and equipment? This is common for plumbers, electricians, carpet cleaners, pest control, etc, etc where you need to put the new employee out on the road in order to generate revenue. For these types of positions you need to be extra sure that you can get the work lined up to cover the costs because it is more than just wages you need to cover, you will probably have loan payments for the new vehicle or equipment you purchased.
Is the position revenue generating or overhead? The math is quite a bit different depending on whether you are hiring a revenue generating position, or an office and admin position. For a revenue generating position they should be able to start paying for themselves probably within a month or two. Overhead positions need to be completely covered by your current revenue generating employees. You should not hire additional overhead until you know you can already afford their monthly salary because they won’t be adding any additional revenue to the company.

According to an Inc Magazine article nearly 50% of new businesses don’t see their 5th anniversary, but here are some tips if you find yourself unable to make payroll one week.

3 Steps to Calculate your Overhead Expenses

February 2, 2016 by Adam Hoeksema Leave a Comment

As my day job I manage an SBA loan program where we help small businesses with funding and then business coaching before and after the loan. I am becoming increasingly convinced of the importance of understanding your breakeven as a small business owner. To define breakeven, it is basically the point at which your sales match your expenses. If you sell anything less than your breakeven amount, you are losing money. I just wrote a more detailed blog post on how to determine if your business is breaking even here, but today I am going to focus on an important component of calculating your breakeven, that is – your overhead costs.

What are Overhead Costs?

First we should define overhead costs so that we are all on the same page. According to Investopedia:

“Overhead is an accounting term that refers to all ongoing business expenses not including or related to direct labor, direct materials or third-party expenses that are billed directly to customers. Overhead must be paid for on an ongoing basis, regardless of whether a company is doing a high or low volume of business.”

Examples of Overhead Expenses

I think it is helpful to list some examples of expenses that are considered overhead:

Rent
Telephone/Internet
Insurance
Utilities
Wages and salaries for sales, management, and administrative staff

These are all expenses that will be the same for you each month whether you sell 1 unit or 100 units.

Examples of Expenses that are Not Overhead

I also think it can be helpful to list some expenses that you should not count as overhead such as:

Material costs to make your product
Labor cost to make your product

These expenses are often considered your Cost of Goods Sold.

How to Calculate Your Overhead Costs

Step 1 – Categorize Every Expense as Overhead or Cost of Goods Sold

This seems pretty straightforward right? Basically you just need to categorize each expense and ask yourself the following question:

“If I didn’t sell anything next month would I still have this expense?”

If the answer is “Yes” then that expense is probably overhead.

Cost of Goods Sold expenses tend to be tied directly to production of a product or service. So if you have a manufacturing company then the labor expense for those working on the assembly line would be cost of goods sold because if you didn’t have any orders to produce next month, you would not have the labor expense.

Step 2 – Are some Expenses part Overhead, Part Cost of Goods Sold

In step 1 I bet you will run into some weird situations where you feel like an expense is part overhead and part cost of goods sold. For example, let’s say you own a plumbing company. Your plumbers make $15 per hour and they work 8 hours per day. On the average day you have them doing billable work 6 hours per day, but you still pay them for 8 hours. There is 2 hours where they are really more of an overhead expense to you, and the 6 billable hours they are more like cost of goods sold.

So you might want to consider breaking out 1 expense into X% overhead and X% cost of goods sold.

Step 3 – Consider all Cash Outflows

Finally, you might have some other cash outflows that are not technically expenses, but for most small businesses should probably be considered when thinking about overhead. The best example is a Loan Payment.

A loan payment is split between interest and principal. Technically the principal portion is not an expense, but when you are trying to determine what your monthly overhead costs are, you might as well include the entire loan payment so that you know exactly how much cash you need to bring in to break even.

If you have any specific questions about whether an expense should be counted toward your overhead or not, I would be happy to help. View our projection templates like our manufacturing cash flow template online. Email me at support@projectionhub.com

Home Health Care Business Income | Learn About Home Health Care Business Profit Possibilities – ProjectionHub

December 18, 2015 by Adam Hoeksema Leave a Comment

What Are The Home Health Care Business Profit Possibilities?

$72 Billion with a B.

According to a report by the National Association for Home Care & Hospice the annual spending on home health care was $72 Billion in 2009. Clearly the industry has only grown since 2009 and looks like it will continue to grow as the “Baby Boomers” look to age in their own home. So if you are thinking about starting a Home Health Care Business you need to go through the home health care financial projection financial projection process first so that you know exactly what you are getting yourself into.

We have created a home health care financial model that you can use here.

Once you sign up using our home health care financial model there are 5 key steps to walk through to create a set of projections.

Step 1 – Home Health Care Revenue

Revenue projections for an in-home health care company should be relatively straightforward. You are basically need to know the following:

Number of patients
Average billable hour rate for services provided
Average number of hours provided each month per patient

Multiply all of these together and you will come up with total monthly revenue.

Step 2 – Home Health Care Expenses

Home Health Care Cost of Goods Sold

As a home health care business your labor cost of goods sold will be (by far) your largest expense. You will first have to determine what types of services you are providing. If you are providing medical services you will need higher cost workers, if you are non medical your staff hourly rate will be much lower, but so will the rate you can charge your end customers. In the table below you can get some general idea of the hourly rates for different positions. Based on a report by USA Today, the average gross margins for home health care businesses is between 30 and 40%. Notice this is from 2009, it was the most recent data I could find, so rates have likely gone up a bit.

Home Health Care General and Admin Costs

In addition to the staff that are providing the direct services to the patients, you will have wages and salaries for General and Administrative staff. Below you can see some of the potential positions you may have as well as some compensation figures.

You will obviously have other general and admin costs such as insurance, rent, and vehicle maintenance. I have provided a screenshot below of the general and admin costs that I added to the Expenses page on ProjectionHub:

Step 3 – Home Health Care Assets

Computers/Tablets/Phones

Your staff may have company computers, tablets or phones that you own and will need to add as an asset.

Vehicles

You might have company vehicles that you own. If you own them you should include them as an asset. If you are renting or leasing you should just add the monthly expense in the expenses section of ProjectionHub.

Medical Equipment

If you are providing medical services there may be specific medical equipment that you need to have on hand to provide those services.

Office Furniture

You can also include any office furniture that you might have in the assets section.

Step 4 – Home Health Care Financing

This can be a pretty expensive business to get started. The main reason you are going to need funding is for ongoing working capital. Working capital is the money that you use between when you pay staff to provide services and the time that you get paid by Medicare, Medicaid, Health Insurance companies or private pay individuals. It could be 30 to 60 days between the day your staff provide care for a patient and the day that you get paid. You will likely need a line of credit to fill this gap. In the early years it could be really tough to get a line of credit from a bank, so you might just need to start out with an investment from friends and family and a term loan from the bank that is collateralized by equipment, vehicles, or maybe your retirement account.

In this example I have projected a $100,000 personal investment and a $100,000 loan from a bank to help you get started.

Step 5 – Home Health Care Projected Financials

That is it, now you can download your set of home health care financial model projections to share with your potential lender or investor. Here are some projections for an in home health care company that you can use. You can get started with your own in-home healthcare projection cost template and medical office financial projections template.

Contact support@projectionhub.com if you have any questions or pick an excel financial
projection template for one of your projects.

Photo by Kampus Production from Pexels

Starting a Photography Business: From Hobby to Profits

November 27, 2015 by Adam Hoeksema Leave a Comment

You have 140,000 competitors…

According to the US Bureau of Labor and Statistics, there is likely about 140,000 “professional photographers” in the US.

With that level of competition, if you want to turn your photography hobby into a profitable business, you are going to master the financial side of the business. Here is an article by ShootDotEdit that would be helpful as a general overview when starting a photography business, and in the article below I am going to walk you through the process of creating financial projections for your new business. This process will help you get a feel for how many jobs you need in order to breakeven and/or leave your day job.

Step 1 – Sign up for ProjectionHub Photography Financial Model

We have developed a professional service projection template which can be used for your photography businesses

Step 2 – Project Income for the First Year

It seems that most photographers go from hobby to career by taking pictures for friends and family at weddings, engagements, and family photo shoots. This is how you break into the industry because you need to have a portfolio of your work to show off to potential customers. In the financial model that we developed we added 3 default revenue line items:

Charge by the Hour – Sales – Here you can project sales for customers that you bill by the hour. You might not be selling any specific package, rather you are simply charging an hourly rate. So the question is how much to charge per hour? This is an excellent article that talks about how much you should bill based on how much you hope to earn in take home pay per year. As a general rule of thumb you should charge at least 2 times as much per hour as you want to take home for yourself. So if you want to earn $60,000 per year, you should bill $60 per hour so that you can take home $30 per hour X 40 hours per week X 50 weeks = $60,000. One reason is because you will obviously have expenses, but you also won’t be able to bill a client for every single hour you work. Many of your working hours will be non-billable, some suggest that 50% will be non billable. When you are getting started, don’t price your services too low because it is not sustainable, make sure to bill at a sustainable rate as early on as you can.
Services for Individuals – This is probably where you will get your start. By providing packages to friends, family, and acquaintances first you can build a portfolio and improve your skills. As you think about how to structure and price your different packages I recommend this helpful article – “How to Create Photography Packages that Sell” As you are projecting your revenue for packages that you sell, you should be able to break it down to the number of billable hours and your rate per hour.
Services for Businesses – At some point you may expand from services only for individual weddings, family pictures etc, to start serving businesses. In this situation you may just charge by the hour, or offer packages.

Photography Business Cash Flow Considerations

When you book a job you should probably receive a deposit up front. This means your revenue projections should consider this unique aspect of cash flow.
Keep in mind that photography can be quite seasonal depending on your market, so you need to plan accordingly. This is why it is great to receive deposits up front, you can get deposits in the fall and winter for weddings the next spring and summer to even out your cash flow during the slow season.

Assumptions for Expected Revenue Projections

Below I have included the assumptions that you will need to develop for your own specific scenario:

How many weddings do you expect to happen next year in your network of friends and family? Lets assume 10 and that you will be able to convince 5 to use your services.
Let’s assume you charge $2,000 per wedding and get paid 1/2 up front
How many potential portrait sessions are there in your friends and family network? Estimate the number of graduations, engagements, new babies, and other events that might be a good excuse for a portrait session. Let’s assume 40 of these in your extended network and you can close a deal with 12 people (1 per month).
Lets assume you charge $500 per portrait session and get paid at the time of the service.
Finally, let’s assume you secure a couple of freelance corporate projects at $1,000 per project toward the end of the year after you have built up a portfolio.
One nice thing is that you should be able to start booking some weddings for the following year the last few months of the current year which will help your cash flow.

Based on these assumptions you can have a starting place for your revenue forecast

Step 3 – Forecast Expenses

Expenses are a bit easier to project in the first year. Here are expenses that you should expect:

Step 4 – Getting a Loan for a Photography Startup

In addition to these monthly expenses, you will also have several thousand dollars of startup costs to buy a computer, photo editing software such as Picsart to quickly edit images, a camera, and accessories. You will be able to add these in the “Assets” section of ProjectionHub. Once you add those startup costs, you will be able to determine how much of a personal investment you will need to make, or how large of a loan you will need. I added the following startup costs/assets:

Computer – $3,000
Furniture – $500
Camera – $3,000
Camera Accessories – $1,500
Total = $8,000

Then you can add a loan (maybe it is a loan from friends and family) for your startup. I am assuming you will need about $10,000 in startup funds to make the cash flow work.

Step 5 – Transition from your Day Job to your Business

I titled this blog post as a transition from Hobby to Full-time because it will need to be a transition. It is simply a tough business to jump into full time right away. In this projection I assumed you paid yourself $250 per month for the first 3 months and then increased that by $250 every 3 months for the first year. You obviously will need to have another source of income in the first year.

We would love for you to try out ProjectionHub to create your own financial projections and please reach out if you have any questions at all – we are here to help – adam@projectionhub.com

Starting a Dental Practice? How to Build Financial Projections

November 23, 2015 by Adam Hoeksema Leave a Comment

If you are looking to start a Dental Practice you are likely to need some financing, which means you probably need some financial projections. According to a report by Sageworks, Dentist Offices show an average of 14.9% net profit margin. This is great, but as a Dentist, you didn’t go to school for financial modeling, so that is where we come in to help.

We have created a custom dental office financial plan model for a dental practice which you can use here.

Once you sign up and use the Dental Practice financial model, then you can start by projecting your revenue (income):

Step 1 – Dental Practice Revenue Projections

There are a number of services that a dentist can provide, the list of services that we have added to our model is as follows:

Cleaning/Exam
Dental Bridges, Crowns and Implants
Emergency Dental Services
Extraction
Fillings
Oral Surgery

The question is how do you predict how much revenue you will generate for each of these services? In my opinion a good way to model a dentist office is to start with the number of patients you can secure for regular exams and cleanings. That is your customer base, then from your customer base you will be able to predict the percentage of the general population that needs crowns, implants, tooth extraction, cavity fillings, etc. You need to focus on building your customer base and how that business model works, and then simply assume some percentages for all of your other services based on the core customer base.

So here is the exercise I think you will need to go through to build out your revenue projections:

How much advertising will it take to acquire one new patient? Whether you do radio, tv, Google, or direct mail advertising, you will need an advertising budget and will need to assume some cost per acquiring a new patient. This Question and Answer on Quora gives some nice guidelines on how to calculate this. Since you are a new practice let’s assume that you have to spend $200 in advertising to acquire a patient, and initially you are starting with a $5,000 monthly ad budget. This will bring in 25 new patients per month.
Now you need to determine how much revenue you will generate from the first visit of each new patient, then what percentage of patients will you retain to create your patient or customer base, and then finally how much will your patient base spend each month on the various services you provide. I have created a spreadsheet to help model revenue for a dental office that you can use here.
In order to determine how much revenue you can generate from your different services I suggest that you find some stats on the prevalence of various issues like cavities, the need for crowns, root canals, etc. For example the CDC provides data on the prevalence of tooth decay (ie the need for fillings) among the US population.

In this example I created a basic revenue projection for a startup dental office in the first year. Total revenue for the year is only $73,000 which is much less than what you might be hoping to bring home as a first year dentist, but you have to start somewhere. As your customer base grows, revenue and profit can grow substantially.

Step 2 – Expenses for a Dental Practice

Our financial model also has about 20 default expenses related to dental offices. The key expenses I want to point out are:

Advertising is $5,000 per month – this is what you use to acquire new patients
Insurance can get pretty expensive when you include malpractice insurance and liability insurance for the office. This article is a helpful guide and helps me estimate around 1,500 per year for all the insurance you need.
Software – you can price different software packages for dental offices here – I would expect at least a $1,000 set up fee and $300 per month as an average.
Wages – I am assuming that you don’t hire a dental hygienist until month 7, you will just do the cleanings yourself initially. I am also assuming that you don’t take a salary yourself until month 7 at which point you take a small $1,000 per month owner draw. Finally, I assume a part time office manager at $1,500 per month.
Equipment Rental vs. Purchase – You will certainly want to consider the difference between leasing/renting equipment and furniture vs. purchasing with a loan. In this example I am going to assume you purchase with a loan.

There are a number of other common expenses that you will need to estimate.

Step 3 – Equipment Required for a Startup Dental Office

According to an article by DentalTown written in 2013 the average price to open a new dental office can range between $250,000 and $500,000. The primary expenses include:

Equipment and Furniture – $150,000
Leasehold improvements – $200,000 (assuming 2,000 square feet at $100 cost per sq. foot)
Working Capital – $50,000 you are also probably going to need approximately $50,000 in working capital to fund your operating losses during the first year while you get started

This is a total cost of $400,000.

Step 4 – Financing for Dentists

Coming up with $400,000 is not easy, so you are likely going to need a loan or an investor. Banks seem to like dentists, for example Bank of America has an entire program established for new startup dentist practices. The Bank of America program boast 100% financing, so you may be able to secure the full $400,000 in a loan. In this example, I am going to assume you get the $400k from a lender.

Let’s assume you also raise an investment from friends and family for $75,000 just to give you some extra wriggle room in that first year if things don’t go quite as planned.

Step 5 – Example Financial Projections

Starting a new dental practice is not for the faint of heart. You should expect to lose significant money in the first year as you build up your customer base, but as you know once you build a strong customer base this is a very profitable business.

If you would like us to review your projections for your specific situation please don’t hesitate to reach out, we can help. Email adam@projectionhub.com

Top Photo by Anna Shvets from Pexels

#StartupChats

July 14, 2015 by Adam Hoeksema Leave a Comment

We’ve been MIA for awhile, but we promise it’s for a very good reason. (More details to come on that later.)

If you’ve been away for as long as we have, here’s something you might have missed. We were honored to be asked by Startup Canada to join their biweekly Twitter #StartupChats. Our session, repped by our awesome Adam, was about Balancing Finances and Cash Flow for Entrepreneurs (sponsored by Scotia Bank). The chat also included Elaine Orr, CEO of Balancesheets, a Quickbooks expert, and Bplans – a website that provides excellent resources (many of which are free) for entrepreneurs and business owners.

But what’s more exciting than reading about the chat? Reading the actual chat. Find the whole thing here at Storify:
http://bit.ly/1CEiMn6

Also, if you’ve been waiting for a sign, here it is! Sign up for your 7 day free trial now, because we’re back in full swing with some awesome changes up our sleeves.

How to Create Financial Projections for a 2 Sided Marketplace

December 13, 2014 by Adam Hoeksema Leave a Comment

Two of the hottest startups in the world right now are 2 sided marketplaces – Airbnb and Uber. We know that marketplaces can create incredible value when they reach scale (think ebay, Amazon, Uber). But we also know that 2 sided marketplaces are incredibly difficult to reach scale.

The reason it is so difficult to start a 2 sided marketplace startup is because it is essentially like starting two different businesses. You have 2 different customers. You must have buyers and sellers at the same time. This is why many marketplace businesses start with very narrow niche industries. For example, eBay started with Pez dispensers. As you grow you will likely need to subsidize one side of the marketplace. For example, sellers might be willing to pay for more buyers. There is a great Harvard Business Review article on 2 sided marketplaces that discusses subsidization of one side of the marketplace.

There is likely some very complicated math that would tell you what percentage of your users need to be buyers and what percentage need to be sellers. Every marketplace is going to be different. Here is a Quora Question and Answer that identifies some of the key questions that determine what percentage of buyers vs. sellers you will need on your platform.

As an example, let’s look at a seller on eBay and a “Seller” on Uber.

A seller on eBay might have 200 units of a given product in stock. Each buyer might only need one of those products, so a given seller on eBay might be able to support 200 buyers at a time.

Uber on the other hand is quite different. A “seller” which is the driver in this case can only drive 1 or 2 buyers around at a time. It is likely that you might need a higher percentage of sellers on Uber than on eBay.

As a startup you probably aren’t going to know the perfect mix of buyers vs. sellers, so you are going to have to make a hypothesis. You can then advertise to secure a critical mass of buyers and sellers in a particular market. In just about any marketplace business, it is important to dominate a niche market initially, and then grow from there. (Zero to One by Peter Thiel is a good read on this topic)

Ok so let’s get into the financial model now. I am going to assume that you have figured out/or made a hypothesis to estimate the breakdown of buyers vs. sellers that you should have. And for this revenue projection, we are going to focus on the buyer side of the market.

You can download the Marketplace Financial Projection Template that I created, and follow along.

Let’s get started:

Step 1 – Estimate your Market

Start by estimating the size of your market. Let’s say you are starting a platform for employers to find graphic designers straight out of college. So graphic design students would create a profile and employers would pay to be able to view the profiles and contact students that they might like to interview. You could say that your total market is all employers that need graphic designers, and all graphic design students.

Step 2 – Narrow Down to a Target Market

You should probably start with a target market first. Maybe your target market is only graphic design students in San Francisco, and the target employers are tech companies in silicon valley.

Step 3 – Estimating Leads

So if your marketplace is a web based platform, then your leads are website visitors. You will need to estimate how many people you think you can get from your target market to visit your website.

Step 4 – Conversion of Leads to Users

Some percentage of those website visitors will turn into users. You will need to estimate a conversion rate.

Step 5 – Retention of New Users

Once you estimate new user signups, you will need to estimate how many of those new users will just drop off and never use the platform, and how many will continue on as active users.

Step 6 – Average Purchase $ Amount

The next step is to estimate the average dollar amount per purchase. Are users purchasing $25 Uber rides? Or $2,500 Airbnb vacation rentals?

Step 7 – # of Purchases Per User Per Month

How often will an active user purchase? An active user of Airbnb might purchase once a year while an active user for Uber might purchase once a week or even everyday.

Step 8 – Flat Fee Charge Per Purchase and/or % of Purchase Price Charged as Commission

Now we are finally getting to platform revenue. Typically marketplace platforms will charge a flat fee per transaction, a % of the purchase price, or both.

This process will give you a base model to get an understanding of your financial potential. It will also help you understand the economics of the platform, how many users you might need in an area to breakeven, etc.

Once you have your base revenue projections complete you can complete the rest of your financial projections using our ProjectionHub platform. Please feel free to reach out if you have any questions – adam@projectionhub.com

Why Banks Must Standardize the Financial Projection Process

September 17, 2014 by Adam Hoeksema Leave a Comment

Standardization. Banks have standard forms for everything. Standard loan applications, standard personal financial statements, standard credit release forms, etc, etc. But for some strange reason, banks do not have a standard for financial projections. When it comes to financial projections, banks will accept just about anything. I have seen a projected income statement that shows expenses on top and revenue on the bottom, I have seen annual projections, monthly projections and even weekly projections, I have seen Excel templates with 50 or more tabs, and 1 tab Excel templates, I have seen projected balance sheets that don’t balance!

Why is this acceptable?

Why in such a standardized industry like banking, do bankers continue to put up with such a messy process when it comes to financial projections?

I think there are a few reasons:

Financial Projections are Just a Check-mark on the List – For the average business banker it can be like pulling teeth to get a loan applicant to put all of their documentation together, so once you finally have a set of financial projections in hand, the last thing you want to do is criticize them, you now have a full packet to send to underwriting, so just let them deal with it.
There is a Gap Between Sales and Underwriting – The previous point really represents the fact that there is a gap between sales and underwriting. Sales, aka the business banker, wants to get complete packets to send to underwriting. The underwriting team wants quality projections that they can analyze quickly and efficiently with their spreading software. Underwriters don’t want to have to go digging around for the numbers they need to produce for their spreading software.
Because Projections are Typically So Bad Lenders Don’t Give Them Any Weight – Finally, I think because projections are typically so far off, lenders don’t really care what they say, they don’t have time to educate the business owner on how to create realistic, data driven financial projections. So the easiest thing is to simply give the projections a 50% haircut right off top line revenue and see if they can still handle the debt service.

Despite these issues, there are several reasons why banks large and small should standardize the financial projection process.

Save time – I can not fathom how much time is wasted in underwriting departments around the world each year because there is no standard format for financial projections. Somewhere in a dark room there are underwriters clicking through 50 tab Excel templates looking for the numbers they need to enter into their spreading software or credit memo. If there was a standard format, underwriters could find those number immediately.

Make better comparisons between businesses – If you don’t have a standard format for financial projections how can you compare one business to another? How do you know whether the business owner “get’s it” or not. If you can’t complete a set of financial projections for your business, and you don’t have anyone else helping you that can, then you probably don’t deserve a loan. When you have a standard format, it will be much easier to compare a good set of forecasts to an unrealistic forecast.

Push their clients forward – Finally, lenders should be pushing their clients forward. Push them to grow, push them to imagine how to be more profitable and to plan their growth. If the business grows, so does their need for capital, their deposit base, and their need for other bank services.

So at ProjectionHub we are at the very beginning stages of determining how we can help banks benefit through the standardization of financial projections. We have a solid tool in place now, and we continue to iterate and improve. In Q1 2015 we will launch Version 2.0 of ProjectionHub which will support white label versions of the tool for banks to implement into their loan application process and customers will never have to leave the banks website.

We think there is an incredible opportunity for lenders to up their game when it comes to financial projections, and we want to be that gold standard for the future.

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.

4 Ways to Improve Your Cash Position

August 12, 2013 by Adam Hoeksema Leave a Comment

One area that we focus on at ProjectionHub is cash balance. For a small business, cash is your life blood. Often, business owners just put their head down, work as hard as they can as fast as they can. Then they check their bank account and it just doesn’t seem to reflect how hard they are working. Managing your cash is more than generating more sales and reducing expenses. In fact, there are a few tricks that can drastically improve your cash position without changing your sales or expenses.

Deposits – A common way for business owners to raise cash is by requiring that customers put down a deposit for the product or service. Tesla is high profile example of how to utilize deposits to improve your cash position. As of December 31, 2012 Tesla had 15,000 orders from customers who had put down either $5,000 or $40,000. Even if all 15,000 orders were only for the $5,000 version, Tesla would have still raised $75 million in customer deposits. This improved their cash position and gave them asset that they could then use to raise additional capital through lenders and investors.
Discounts for Early Payment – Many of your customers may be just like you. They are trying to preserve cash, and are not able to take advantage of early pay discounts, but it may be worth a shot. Many businesses will give their customers a 2% discount if they pay their bill within 10 days. Many software as a service companies that charge their customers a monthly fee will give a steep discount if you pay 6 or 12 months in advance. For example, Quickbooks Online typically offers up to a 20% discount if you pay for an entire year in advance. This is a great way for Quickbooks to improve their cash position, and lock in customers for the long term.
Factoring Receivables – Waiting 30 or more days for your customers to pay can kill your cash flow. You may need to consider factoring your receivables. Factoring companies will give you cash immediately for your outstanding receivables. For example, a large customer might owe you $50,000, but they won’t pay for 3 months, you need the cash now though, so a factor might give you $48,000 now and will keep the remaining $2,000 when the customer pays. Our partner, Lendio, provides a free service that will match you with the right lender or factor to support your cash flow needs.
Negotiate Payment Terms – You might be surprised to find out that your suppliers may be ready and willing to negotiate payment terms with you. Some vendors may give you an extra 15 to 30 days to pay your bills just because you asked, and because you are a valued customer. Others may give you extra time, but may charge a nominal late fee. At times it may be worth paying the $50 late fee to hold on to your cash for another month.

Keep these 4 techniques in mind when you are looking to raise additional cash, or simply need to preserve your cash. You may not always be able to raise additional funding through loans or investments, so that is when these 4 options become very important.