question about start up costs

[gib99]

Hello,

I'm studying this business plan (http://www.bplans.com/computer_software_business_plan/company_summary_fc.php) and I'm wondering how they break down the chart at the link above.

They break it down by expenses, assets, investments, and loans.

The way I read this is: to start out with, they have roughly $100,000 in loans, $145,000 in investments, $220,000 in assets, and are willing to allocate $22,500 out of pocket.

I'm not sure if all of this is reflected in the tables, either the one above or below the graph. The one above the graph is simply the assets and services the business needs to start up. The one below *seems* to be a break down of the graph. It goes by a few different terms (liabilities instead of loans), but I think in one way or another it represents a break down of the graph.

Am I right?

I think I need to understand these terms better.

[Business Attorney]

I understand the numbers they use in the template but I think it is a very confusing way to present the information. The graph, particularly, seems to serve no purpose. Expenses plus assets are the "use of funds" and the loan and investments are the "source of funds". Combining them in a single graph seems strange. I wouldn't use a visual at all, but if I did, I would use two pie charts labeled "source of funds" and "use of funds".

Further, listing a bunch of expenses totaling $22,500 and then listing an asset of "Cash required" as an asset without any explanation of what the cash is required FOR, makes no sense.

Keep in mind that this is only a template. If you are doing your own business plan, I would hope that your numbers would make more sense than the ones plugged into the template for illustrative purposes.

[gib99]

I understand the numbers they use in the template but I think it is a very confusing way to present the information. The graph, particularly, seems to serve no purpose. Expenses plus assets are the "use of funds" and the loan and investments are the "source of funds". Combining them in a single graph seems strange. I wouldn't use a visual at all, but if I did, I would use two pie charts labeled "source of funds" and "use of funds".

Further, listing a bunch of expenses totaling $22,500 and then listing an asset of "Cash required" as an asset without any explanation of what the cash is required FOR, makes no sense.

Keep in mind that this is only a template. If you are doing your own business plan, I would hope that your numbers would make more sense than the ones plugged into the template for illustrative purposes.

Thanks Business (or would you prefer Mr. Attorney :lol: ),

You've put into words something I sensed was "off" in the graph/table but only intuitively. Yes, there seems to be a mixing of "use of funds" and "source of funds". I think you hit the nail right on the head. I further think the assets and expenses should be split into "funds to be spent" and "funds possessed". I guess the idea is that this is what they expect to start out with.

I won't be just copying and pasting from this template. Rather, I'm trying to understand the underlying meaning/purpose of this section. I sense that there's some basic concepts being laid out here that one learns in "business 101" so to speak. I haven't taken any business courses. I think I just have to learn a few terms. Like what's the difference between assets and capital? What's the difference between revenue and cash flow? Things like that.

Any insight on your part (or anyone else's) is hugely appreciated. Thanks!

[Paul]

I understand the numbers they use in the template but I think it is a very confusing way to present the information. The graph, particularly, seems to serve no purpose. Expenses plus assets are the "use of funds" and the loan and investments are the "source of funds". Combining them in a single graph seems strange. I wouldn't use a visual at all, but if I did, I would use two pie charts labeled "source of funds" and "use of funds".

Further, listing a bunch of expenses totaling $22,500 and then listing an asset of "Cash required" as an asset without any explanation of what the cash is required FOR, makes no sense.

Keep in mind that this is only a template. If you are doing your own business plan, I would hope that your numbers would make more sense than the ones plugged into the template for illustrative purposes.

I agree that is more confusing then helpful. Typically you would present a basic balance sheet listing assets including cash, then liabilities including loans payable, resulting in a net valuation. Present this in a standard accounting format. You can use charts or graphs BUT keep them simple and easy to understand and don’t overuse them.

You can use terms like “cash on hand”, “loan proceeds”, investment proceeds” to differentiate. You can use short term loan, long term loan etc.

Then a projected Profit & Loss and you can also show projected balance sheet as the business grows. Depending on the business you can show projected or historical cash flow. Sometimes the cash flow is as important as the P&L for some situations. Be aware that cash flow is different than profit & loss.

Don’t get too caught up in charts and graphs. They are just a quick visual for the numbers. Concentrate on explaining the business and justifying the projections.

[tallen]

revenue vs. cash flow -- this largely has to do with accrual vs. cash-basis accounting methodology, but there is another aspect as well. First, accrual-basis accounting -- the business records income on its books when it sends an invoice, not when the invoice is paid, and the business records an expense when it receives a bill, not when the bill is paid. This means that the actual flow of cash through the business, the receipt of incoming payments from customers and the disbursement of outgoing payments to vendors, does not necessarily match the income and expenses shown on the company's books (i.e., a P&L statement). This is largely a matter of timing -- if everybody pays their bills on time (say, within 30 days), then the company's actual cash flow is only lagging behind their P&L statement by about a month. But as we know, not everyone pays their bills on time, so a business could look profitable on paper but have a negative cash flow if they've paid all their bills but none of their customers have paid them yet. With cash-basis accounting, the company records income and expenses on their books when they are actually paid, rather than when they are billed. The other aspect to revenue vs. cash flow is that cash-flow is usually referring to both incomings and outgoings of cash (the net), where revenue often is only referring to the gross sales of the company (without consideration of the expenses), unless it is specified that you are talking about net revenue...

capital vs. asset -- capital is a sub-category of assets; assets are all the things of value held by the company including fixed assets like "plant and equipment," as well as the company's inventory of goods ready to be sold and the cash in their bank accounts, but also their intangible assets like "intellectual property" and "customer goodwill" (these latter things are usually difficult to evaluate, but they can get bought and sold). Capital (by itself) usually means just those assets that can be used to purchase other assets or pay for operations, so things like cash in the bank or other "liquid" assets (financial assets that can easily be converted to cash). Sometimes people use the term "capital assets" to refer to fixed assets, things that under current accounting and tax rules must be depreciated over time rather than expensed in the current period. To "capitalize" something is to move it onto your depreciation schedule and table of fixed assets....

My understandings, for what they are worth.

[Paul]

revenue vs. cash flow -- , not everyone pays their bills on time, so a business could look profitable on paper but have a negative cash flow if they've paid all their bills but none of their customers have paid them yet. .

As Tallen explained, cash flow is very different from P&L. A company can actually go broke being profitable. That is why companies need “working capital” to survive the cash deficient periods. As example a company can get a million dollar order but has to pay for the order before they get paid. Without sufficient capital they can not accept the order regardless of how profitable it may be. Lack of working capital hampers many companies ability to grow, but it is the easiest money to raise from investors and banks and other finance facilities.