The Defining Dozen: #9 – How much money do you need and how much will you make?

Learn how to answer the ninth of the "Defining Dozen" questions – How much money do you need and how much will you make? – so you can write an effective business plan.

In Step 3 of "10 Steps to Open for Business," answering the “Defining Dozen” questions is vital to writing a good business plan. The Sloan brothers describe them in detail in StartupNation: Open for Business, their book. Here is the ninth of those questions, in a special book excerpt:

How much money do you need and how much will you make? Now’s the time to start mulling over your financials. The two fundamental ingredients here are the expenditures required to transform your idea into a viable, operating business and the revenues that that business will generate. You’ll start by thumbnailing how much you’ll spend on things like facilities (be it a retail store or a home office), product development, travel, legal fees, inventory, office supplies, marketing, and salaries for your employees. Be thorough. Talk to other people in your field, join an entrepreneur networking group in your industry, and pick their brains about how much it cost them to get started.

Then rough out your revenue projections. This should be the exhilarating part. It’s when you start to see how your idea will turn into actual dollars. Although this will be exciting, don’t project outlandish revenues. You’re setting yourself up for failure if you do. First, you’ll feel less than successful if you don’t meet those revenue targets at the end of the year. Second, overhyped revenue projections may lead to hiring too many people or building up huge inventories that you can’t sell. Third, if you base your company’s valuation on those revenues and don’t meet those goals, you’ll severely damage your credibility with the money people and your future money-raising prospects. Take our advice—underpromise and overdeliver. You’ll feel like a star if you exceed your revenue projections and you’ll have more money in the bank to reinvest in your company’s future.

Lastly, don’t forget to identify when you expect revenues to be received versus when you expect expenses to hit. This is a basic form of a cash flow analysis designed to let you know if and when you’ll need to access additional capital in order to keep the business alive. If the capital required exceeds what you have available, that means you’ll have to raise some money.

Excerpted from StartupNation: Open for Business Copyright© 2005 by Jeff Sloan and Rich Sloan. Excerpted by permission of Doubleday, a division of Random House, Inc. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.

Learn more about the Sloan brothers’ secrets to business success – buy the book StartupNation: Open for Business now.

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