Self Help

Before trying to raise any money you must know what your total capitalization should be. You must predict the all-important cash flow of the business during its first three to five years. From these you can guesstimate profit-and-loss statements for those years, called pro forma statements.

Bankers love pro forma statements, which can be checked later to make sure a business is on target. A three-year projection may seem like building a castle in the air, but it can be done scientifically. You begin by estimating (conservatively) what your sales volume will be. Then you ask yourself what proportion of this volume will be day-to-day operating expenses.

The proportion of expenses to sales is called the operating ratio, from which you can figure how much capital you’ll need. If this sounds complicated, it is. Don’t try to make the projection yourself unless you’re a trained accountant or statistician; hire a CPA to do it. The accountant may be able to figure how many machines you’ll need, or how many employees, but he may not know how much they’ll cost. It will probably be up to you to get these figures, as well as the estimates of overhead, advertising, inventory, and other outlays.