The question asked by Rail is extremely interesting and complex. First of all, depends whether you are establishing a new business or you are purchasing an existing business. Let us consider first of all if you are starting a business. What I have found is that clients will do up a spreadsheet with all the expenses and these are usually very well done. What they tend to do is make the income match what they think it all to be in order to make a profit. Now that is often a major mistake.
The figures they tend to use are based on best estimates and if the estimated income doesn’t match the desired profit, they then alter the income to achieve the cashflow “bottom line”. In other words, the income is estimated by working out the profit first. This does not make the reality happen.
If you are buying an established business, it is obviously a lot easier because there is a history. However, I suggest that when you are doing up the business plan, particularly the cashflows that you underestimate the income and keep the expenses the same. Because of the change of ownership and to be on the conservative time, I suggest a downgrade of 15% on the income.
