I finally turn the corner and start generating cash in the third month, assuming my forecasts are accurate. Next, my cash outflows exceed my cash inflows for the first two months of my business. This gets back to having sufficient capital to start your business. Now what's the first thing you notice? I sure am glad I had $10,000 to start. I then did the same thing for subsequent months. The $16,000 represents my forecasted fixed costs for the month. The $17,200 comes from the variable costs of $4.30 per customer times 4,000 customers. That results in a forecast of cash inflow of $28,000 for the first month. I forecast 4,000 customers at $7 per customer. Whoa, where did these numbers come from? Let's look at the first month as an example. The result is the cash budget that you see here. I do that by beginning with my cash on hand at the start, add to that my expected cash inflows from customers and subtract my cash outflows for my fixed and variable cost. Now my next step is to forecast my cash flows for this three-month period. We can certainly relax these assumptions, but let's keep it simple to get started. We are going to assume that all bills are paid in the month they are due and that customers will pay me in cash. Now you can start to see how my cash will begin to flow, both into the business and out of the business. I also estimate that my variable cost will be $4.30 per customer for the first two months, and increase to $4.40 per customer in the third month. As word gets out and my business earns its reputation, I forecast being able to increase the average selling price per customer. The reason for the lower selling price in month one is to entice customers to come in and give my business a try. I estimate my average selling price to be $7 per customer in month one, $7.50 per customer in month two, and $8 per customer in month three. I also estimate my fixed costs to be $16,000 per month, and my average selling price and estimated variable costs to be as follows. Let's also assume that I have $10,000 in the bank right now. Let's suppose that I forecast customer demand for my fast food restaurant over the next three months to be in month one, 4,000 customers, in month two, 4,500 customers, and in month three, 5,000 customers. Let's tie this together in one example.
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