The First 90 Days

April 13, 2006

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A lot of new business owners who plan their cash flow needs consider only the cash flow needs up to the day they open for business. They forget to consider their cash flow needs after they are in operation. Having enough cash for the first few months of the new business is just as important as having enough startup cash.

When starting a new business, the amount needed to keep the business running, called working capital, will vary by type of business. If your new business is a one-employee consulting firm, you will have a much smaller working capital requirement than a retail establishment that has a large inventory.

Assume your new business is a retail establishment that is selling furniture and, as a promotion, you plan to give buyers 90 days to pay. Your working capital needs could be huge. First, you have to buy your inventory, then, after it sells, pay for the replacement inventory. This could mean that you will not receive one dollar to pay bills for at least 90 days after you open the doors. If you do not plan for this working capital need in advance, you probably won't even stay in business for 90 days.

A good rule of thumb is to have access to enough working capital to pay all of your bills, except inventory purchases, for the first three months of operations. Inventory purchases will follow the special rules noted below. This working capital will enable the new business to have the needed flexibility the first 90 days.

The reason for the 90 days of working capital is to make up for any mistakes you made when making your cash forecasts. If sales are slow or you run into unexpected startup expenses, this working capital will get you through the slow times.

Included among the Business Tools is an initial cash requirements worksheet for the new business. The worksheet is an Excel 5.0 template. Because it's a template, you can use the worksheet over and over again and still retain an original copy of it.

The worksheet is set up to be used for forecasting your cash requirements for the startup of your new business. We've formatted the worksheet and put in most of the cash requirement categories for you. All you have to do is put in your numbers and print it.

Once you've downloaded the worksheet, feel free to modify it to fit your own needs.

Listed below are the cash requirements needed to keep the business open for the first 90 days. Note that these are the cash requirements that you will incur only from day one of your business through day 90. See our discussion of the costs of setting up the business for the cash requirements up to day one.

Advertising: how much to spend on advertising depends on the type of business and the amount of competition. If you will be opening a retail establishment and plan to get your competitor's customers, your advertising budget will have to take that into account. A good place to find out the amount that should be spent on advertising is from trade publications. See our discussion of advertising and marketing costs for more information on new business advertising.
Bank service charges: these usually are not a significant amount, but your bank should be able to give you an idea of how much to budget per month for these charges.
Credit card fees: these fees are usually based upon card usage. Normally the costs are about 3 percent of the total charges. If you intend to allow your customers to buy your product or services by credit card, and you expect your business to have high credit card usage, allow the full 3 percent of sales. A chief benefit of credit card sales is the immediate business bank account deposit made electronically at the end of each day, making same-day payment a reality for any business doing credit card sales. This is especially advantageous if 30-day or longer payment terms can be arranged for inventory and other vendors. As the volume grows, it may be possible to invest this "float" in short-term 30-day T-bills or other financial instruments to make additional cash.
Delivery charges: these charges are for the cost of having inventory delivered to you. When you arrange for your inventory purchasing, you will be able to find out your delivery charges.
Dues and subscriptions: these expenses will vary by type of business. If you are in a regulated or professional industry, the expenses will be higher. For most retailers, trade association dues are nominal if they are the primary customers or buyers going to the trade shows. However, their travel expenses may be substantial for the many regional and national trade shows. This is also time away from the business, which is stressful for many small business owners.
Interest: if you will be financing your new business with loans, compute the expected interest payments in your working capital needs.
Inventory: when planning your working capital needs, include the additions to inventory that you will not receive cash for immediately. If inventory purchases are to replace inventories from cash sales, do not include them in your working capital budget.

The two extremes below illustrate working capital needs for inventory. Your new business will probably fall someplace in-between.

You have a business that is all cash sales and it takes only one night to get new inventory. In this case, do not budget for additional working capital needs for replacement inventory. Assume that your selling price of inventory will pay for replacement inventory.
On the other extreme, assume that you offer "90 days same as cash" on sales and that all sales are made this way. Also, assume you must pay for inventory on delivery to your business. Then your working capital needs for inventory would be the cost of all inventory sold during the first 90 days.

Lease payments: include the amount that will be paid for equipment and facility leases in the first 90 days of your new business. Determine this amount by bids or contracts. See your office and equipment for more detail on leases.
Loan payments: this is the principal amount related to interest above.
Miscellaneous: use this category as a catch-all for unanticipated costs and miscellaneous items that you will incur during the first 90 days.
Office expenses: these are various types of costs associated with running your business. They include paper, postage, photocopy expenses, etc.
Payroll other than owner: compute the amount that you will incur in the first 90 days of your business. Compute payroll by multiplying the number of employees that will be required for each hour by the expected hourly rate times the number of hours. See the table below.

Number of employees required to be present at all times		3
Number of hours required per employee per day	x	8
Number of days per week	x	7
Number of weeks for first 90 days	x	13
Average hourly rate	x	$6.50
Total payroll other than owner and manager	=	$14,196

Payroll taxes: payroll taxes include Social Security and Medicare tax, and the federal and state unemployment tax. Generally, the total employer's share of Social Security and Medicare tax is currently 7.65 percent of payroll. Use the 7.65 percent as a percentage of payroll unless you will be paying people over $90,000 in 2005; at that point, a different set of rules will come into play. See paying your employees for specifics on computing the various employment taxes. Unemployment rates vary on a state-by-state basis. For your working capital needs, compute the amount that will be due the first 90 days of your business.
Professional fees: the majority of your professional fees will be incurred before you open the doors. In this category include any additional fees such as accounting, consulting, or payroll services that you may need.
Rent: include your expected monthly rent.
Repairs and maintenance: in the first 90 days of your new business, this amount should be minimal, particularly if you are using new equipment.
Salary of owner or manager: remember to include 90 days' worth of your own salary, if you intend to draw a salary, as well 90 days' worth of a manager's salary, if you intend to hire a manager.
Sales tax: sales tax varies on a state-by-state basis. The customer normally pays all sales taxes. If your new business is cash sales, this amount is paid immediately by the customer. If, however, your sales are on credit terms, usually the business is responsible for paying the state at the time of sale, not at the time of cash collection.
Supplies: include the amount you intend to spend on supplies in the first 90 days of your new business.
Telephone charges: check with your local phone company for the business rates. If your business will consist of high telephone usage, bid this between different carriers.
Utilities: include all utilities that your business will require, such as electricity, gas, water, sewer, and refuse collection. These amounts can be estimated by the applicable carriers.