What's keeping you up at night? Send us your most pressing finance and capital questions, and our Finance & Capital experts will hunt down the answers.

Question: I am looking to build a self-serve car wash. I have numbers for land, equipment and building. How do I get reliable numbers for income projections? Trade magazines have surveys, but they are averages and don't reflect location, traffic count , etc. Equipment distributors have nothing but "great" numbers. Can you tell me where to go or how to determine what my income might be?
-- Bill Meritt, JenJer Properties, Peoria, Ill.

Answer: You are very smart to do your homework and create income and expense projections you can rely on. That's a key component of making good decisions about your planned investment.

Here are some tips to consider.

1. Use the trade magazine information for as much of the information as possible. If they don't reflect the traffic information you need, then try to at least get some other financial information from them that may be relevant.


2. You're right that the equipment manufacturer's information is likely to be skewed toward a best case scenario. However, you still need to know those numbers so you can at least have a best case scenario. As you get numbers from other sources you can compare against the best case numbers as a way to ensure you have a more conservative view of potential results.


3. The best source of information is other business owners who own a business similar to the one you are considering. Ask friends if they know someone who you could talk to. Call a business owner in a market where you will not compete and let them know what you are considering. Many people will be glad to share information to help you in your decision. The key is to ask specific questions about performance rather than ask "How much did you make last year". Most people don't like that kind of question. The way to do it is ask questions about traffic per day, average sale amount, specific expense questions, etc.


4. Set up a schedule that shows the complete cash flow picture by month. This is critical. You can look at my December column that provides you a template and step-by-step instructions for formatting easy-to-understand cash flow projections.

Remember, it's all about the cash.

Good luck creating an awesome business, Bill.

Finance & Capital Expert Philip Campbell
http://www.NeverRunOutOfCash.com

Question: I am working on cash flow projections for a new contemporary bakery cafe. What is the process to come up with these numbers?
-- Amy Lau, Not Just Tea Cafe, Forest Hills, NY

Answer: You are very smart to be creating cash flow projections as part of analyzing your new business. Here are some tips to help you:

1. Your cash flow projections should be done by month for the first 12 months.
2. They should start with the beginning cash balance in month 1 and should end each month with the projected cash balance.
3. In addition to your revenue and expense assumptions (I have a few tips for you on these later in this email), be sure to include investment in inventory, property, leasehold improvements, debt service, etc. This is critical so your projections include everything you will be using cash for as you get the business up and running.
4. Be careful not to be too optimistic with your projections. It takes a while for a new business to get up and running and creating revenue.

One of the secrets to creating reliable projections for a new business is to talk to as many other people as possible who own and operate a similar business. You can contact business owners in other cities who will not be worried about you competing with them.

Then have a set of questions written out to ask them about all aspects of running their business and all aspects of their financial results.

Some people will provide lots of information for you. Others will only provide a little. But you will likely find this to be one of the most important parts of your work to create reliable cash flow projections.

Here are a couple links to several of my articles on how to setup your cash flow projections.

The Secret to Formatting Cash Flow Projections
Cash Flow Projections Made Easy

I think you will find these articles helpful as you get started on your projections.

Good luck.
--Finance & Capital Expert Philip Campbell
http://www.neverrunoutofcash.com

Question: My business partner and I are looking for small to medium businesses to buy and manage. We started our search a little over a month ago. One of the common business broker practices that is baffling us is the presentation of "cash-flow" to include owner's compensation. I understand including some discretionary earnings in cash flow (e.g. car lease), but in every definition of cash flow I studied, salary was not included as including salary would lump together the investment piece of the business with the management piece--after all, I do not need to buy a job. Can you comment on the rationale behind this practice?
--Garrett Rush, Tournesol Capital, Alexandria, Virgina

Answer: This is a common practice when brokers, or any business owner, is trying to sell a company.

First, let's look at their logic for showing it that way. Basically, they are saying here is the "cash flow" you can expect this business to provide to you the buyer. They want you to pay a multiple of the cash flow you expect to receive as the owner of the business.

Your point is that to the extent the previous owner worked actively in the business, the compensation they received is just an expense of the business. Just because it was paid to the owner does not mean it should be considered as part of the cash flow that is available to be distributed to the owners of the business.

You are exactly right. And here's how you deal with it.

When reviewing the numbers, add back your estimate of what you would have to pay someone to perform the roles the previous owners played (even if you will be the person in that role). Now you have a better ESTIMATE of the operating cash flow of the business. From those numbers you can apply a multiple you are comfortable with as one rationale for how you arrive at the purchase price you are willing to offer.

Here's another very, very important point you need to consider. Operating cash flow is only one component of the true cash flow of a business. You have to consider capital expenditures, debt service, taxes, additional working capital necessary to grow the business, and a whole host of other factors. You need to prepare a complete cash flow projection for the business to make sure the price you offer is one that positions you to succeed and be financially successful.

Take a look at the cash flow related articles I have posted and read each one. The article on formatting your cash flow projections will be especially helpful to you.

It's hard to fix a bad purchase price once its been made. Make sure you take the time to do it right.
--Finance & Capital Expert Philip Campbell
http://www.neverrunoutofcash.com

Question: I want to start a construction company building custom homes. I have researched the obvious channels of start up capital, i.e. family, and private investors. But I am afraid that I may be over looking other possible options. Can you recommend some other possibilities? Furthermore, I considered restructuring my business plan to build homes for low-income families thinking this could be an avenue in by using grants from such organizations like Department of Housing and Urban Development. What are your opinions on grants? Are there grants that exist for for-profit companies?
--Eugene, Jacksonville, Florida

Answer: I'm not familiar enough with your business to know whether focusing on the low-income housing market makes sense. But I know that there are most definitely grants available for for-profit companies. Many local economic development organizations work hard for companies such as yours…companies that are investing in the communities. In New York, for example, the Partnership for New York City has a program called the New York City Investment Fund that provides capital to for-profit as well as not-for-profit organizations that meet goals for enhancing economic development opportunities. These programs use either private fund, or a mix of public and private funds, to help small businesses.

Moreover, you should investigate your local state and city economic development organizations -- many of which offer grants or investments to targeted businesses. If they don't, they'll know who in your community (or the communities where you're building) do. --Finance & Capital expert Jerry Colonna

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