Lesson 8

USS Biz Trek

Lesson 8: Broke in Space

Lalo: "We’ll make you a good deal," they said. "Put you in a prime location," they said. We’re in the middle of a desert selling mutated lemonade!!! I’m really thinking about changing careers, Alicia.

Alicia: Calm down, Lalo. The Nulian suppliers are doing us a favor. They needed someone to cover their stands for a day and we needed a thrust manifold. It was a good deal.

Lalo: The part is used and their day lasts 36 hours!! It was NOT a good deal. You know, it’s still not too late for me to start a career on one of those ships that takes cruises to Jupiter. Hmm…start out as busboy, work my way up to captain. It’s possible.

Alicia: Geez… and Briana thought Jeff whined about the mission strategy!

Money Plans

Have you ever run out of money? Some people are afraid to start a business for that reason — they might run out of cash. Smart entrepreneurs make plans for handling money before they launch their business. Those plans help them to know exactly how many sales they’ll need in order to pay the bills each month, as well as when the business might reach the profit zone.

Most ‘treps keep expenses low by operating their businesses from home or school, but they may have additional operating costs like phones, pagers, transportation, office supplies, and advertising. Another expense to consider is cost of goods, which includes all the direct costs to produce or manufacture the goods you sell. Cost of goods is kept separate from operating expenses to make it easier to figure profit and taxes.

Keeping the Record Straight

Good record-keeping helps you know how much money is being spent, how much is being earned, and how much profit is being made. For this reason, it is important to set up a system that tracks every penny coming or going in your business. Here’s what a record-keeping system helps you know:

How much profit you’re making
What bills you need to pay
Who owes you money
How much tax you owe
If you can afford new equipment
If expenses are increasing
When you can or need to raise prices
When to discontinue a product
How much spending money you have

Record-Keeping Basics

How to set up a simple record-keeping system:

Gather a notebook, two large envelopes, and a receipt book.
Open the notebook to two facing pages. Label the left page Income and the right page Expenses. Then label one envelope Income and the other envelope Expenses.
Every time you sell something, give your customer a receipt and enter the sale in your Income ledger. File a copy of the receipt in your Income envelope.
Every time you buy something for your business, ask for a receipt. Enter your purchase in your Expense ledger and file the receipt in your Expense envelope.
At the end of the month, subtract your Total Monthly Expenses from your Total Monthly Income to see how much Profit (or loss) you made. Enter that amount at the bottom of your Income page and label it Net Profit.
Create new Income and Expense sheets every month and continue your system.

A certified public accountant (CPA) or tax consultant can help you set up a more advanced record-keeping system as your business grows.

Reaching the Break-Even Point

As a business owner, you need to know how many sales you have to make each month in order to stay in business. For example, let’s look at the lemonade stand where our crew is working. The owners of the company, the Nulians, have to pay operating expenses to keep the lemonade stand open, whether they make any sales or not. If their expenses, or fixed costs, are 10,000 Nulian dollars a month, how many cups of lemonade do they have to sell each month to cover their expenses?

The financial formula that answers this question is the break-even formula. The break-even point is when your business makes exactly enough money to pay the bills, but not enough to make a profit.

Break-Even Formula:	Nulian Lemonade:
Total Monthly Fixed Costs	$10,000
Gross Profit Per Unit	$500

Study the break-even formula above. If the Nulians spend $200 to make each cup of lemonade that sells for $700, their gross profit per cup (unit) is $500. How many cups of lemonade do they have to sell to break even? The answer is 20 cups.

The Profit Zone

Once you hit the break-even point and continue to make sales, you are in the profit zone. This leads to one of the most exciting parts of planning a new business — figuring out how much money you can make. A cash flow projection is a financial tool entrepreneurs use to estimate future profits.

What is cash flow?

Cash flow is the amount of money coming into your business (income) compared to the amount of money going out (expenses). When more money is coming in than going out, you have a positive cash flow.

If you apply for a business loan, you are often required to supply cash flow projections for one to three years. You can make a cash flow projection by estimating monthly income and expenses, then calculating the monthly profit.

Cash flow projections are really plans for the growth of your business. Be realistic when you make these estimates. During the start-up phase, most businesses have a negative cash flow — at least for a while. If that’s the case with your business, show it on the cash flow projection.

Ways to achieve positive cash flow:

Set priorities and delay less-important expenses.
Concentrate on sales and increase your monthly income.
Create a budget (spending plan) for your business.
At all times, keep a certain amount of money set aside as operating capital.
Never spend all you make. Keep reinvesting money back into the business and growing the cash reserves.

Impressing Investors

Making cash flow sheets showing extremely rapid growth and high sales will not impress investors. In fact, it could make you look more inexperienced. Cash flow projections for the first year in business should show a gradual, but realistic, plan for steady growth.

Even if you are not trying to impress investors, cash flow projections are helpful in planning. If you watch your calendar carefully, you will begin to notice certain times of the year when your sales will naturally go up and down. For example, the big season for gift giving is the month of December, with smaller increases around Valentine’s Day and Mother’s Day. With good cash flow projections, you can save your big expenses or investments in equipment for the months when you have the best income.

Time to Get Trekkin’

The financial part of starting a business can often be tricky. However, if you take it step-by-step, you will soon have it under control and your journey toward successful entrepreneurship will stay on target. Use the activities below to plan your financial strategies for the next six to twelve months.