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Key 13: The first year of operations is an important time for a new enterprise

The first year of operations is an important time for a new enterprise. The entrepreneur must work diligently during this period in order to make plans become realities. In the first year, revenues may be less than forecasted amounts and the company may have only enough cash to support a few months of operations. If the enterprise is fortunate and revenues grow more rapidly than expected, the entrepreneur may have difficulty controlling the levels of accounts receivable and inventories. Growth in both of these items may cause the company to exceed its financial capacities. Moreover, a supposedly profitable company may only be profitable from an accounting standpoint. All the profits may show up in receivables (that may not be collected) or inventories (that may not be sold). For the first year in any case, it is cash in the bank and not accounting profit that the entrepreneur should focus on. As a consequence, planning for the first year of operations must be done in detail.

For the enterprise to survive, it will be necessary to develop detailed budgets for revenues, production, expenses and cash flow. Depending on what type of business is created, these budgets may be needed by month, by week, or even by day. Operational and financial surprises can doom a new company and the entrepreneur cannot wait until the end of the first fiscal quarter to ascertain the condition of the business. Firms that sell big-ticket items, such as automobile dealerships, large appliance dealers and homebuilders will not gain much from a daily or weekly budgeting and control system. Alternatively, a restaurant may find itself in serious financial jeopardy if the owner does not have knowledge of daily meals served from the first day of operations. In general, if a company’s sales may vary significantly from day-to-day, the firm should prepare daily budgets and daily operating statements. Depending on the type of company, the new organization should construct the following budgets:

• A monthly (weekly, daily) marketing (sales) budget
• A monthly (weekly, daily) production budget
• A monthly (weekly, daily) purchases budget
• A monthly (weekly, daily) personnel budget
• A monthly (weekly, daily) overhead budget
• A monthly (weekly, daily) operating income budget
• A monthly (weekly, daily) cash flow budget
• A monthly (weekly, daily) cash balance budget
• A monthly (weekly, daily) financing budget

In some situations, the business may not need to create all of the types of budgets; while in other instances, even more detailed information than that specified above may be needed. The budgets that are prepared for the first fiscal year should be based on the operating plan that was created for the complete business plan. For the car wash business (ABC Company), daily budgets should be prepared.