If you are considering starting a new business, you will not know where to start your finances. Of course, you will need a good amount of cash flow to maintain your business. However, if you are organized and thorough, you can plan your funding and keep your start up budget on track.
Here’s how to determine approximately how much you will need to start your business.
You probably have high expectations for your business. However, blind optimism can make you invest too much money too quickly. At the very beginning, it is wise to keep an open mind and prepare for problems that may arise, experts say.
Cynthia McCahon, founder and CEO of Enloop business plan software company, said that business owners should start with a healthy skepticism.”A future business owner should start planning a small business by simply understanding the potential of the business idea,” McCahon told Business News Daily. “What this means does not mean your idea will succeed.”
The best approach is to test your idea in an inexpensive way that gives you a good indication if customers actually need your product and how much they are willing to pay for it, said McCahon. If the test seems to be successful, you can start planning your business based on what you have learned.
Estimate your costs
While each type of business has its own financing needs, there are some tips that can help you determine how much money you need. Entrepreneur Drew Gerber, who launched a technology company, an advertising company and a financial planning firm, estimates that a contractor will need six months of fixed costs at start-up.
“Have a plan to cover your expenses in the first month,” said Gerber. “Identify your customers before opening the door so you can have a way to start covering these expenses.”
When planning your costs, do not underestimate the expenses, and remember that they can increase as the business grows, Gerber said. It’s easy to overlook the costs when you think about the big picture, but you should be more specific when planning your fixed expenses, he added. Indeed, underestimating costs can decimate your business, McCahon said.
“One of the main reasons why most small businesses fail is that they no longer run out of cash,” she said. “Writing a business plan without basing your predictions on reality often results in an unfortunate and often unnecessary business failure. Without the benefit of experience or actual historical financial data, it is easy to overestimate the income of a new business and underestimate the costs.
Understand the types of costs you will
According to the US Small Business Administration, there are different types of expenses to consider when starting your business. It is important to differentiate these types of costs, in order to properly manage the cash flow of your business in the short and long term, “said Eyal Shinar, CEO of Fundbox, a cash flow management company. Here are some types of costs for new business owners to consider:
1. One-time costs versus ongoing costs
One-time expenses will be mainly relevant in the start-up process, such as the costs of incorporating a business. If there is a month where you have to make a single purchase of equipment, your money will probably be higher than the money, said Shinar. This means that your cash flow will be disrupted this month, and you will need to fix the following month. On-going costs, on the other hand, are paid regularly, and include expenditures such as utilities. These do not generally fluctuate from one month to the next.
2. Essential and optional costs
Essential costs are expenses that are absolutely necessary for the growth and development of the business. Optional purchases should be made only if the budget allows. “If you have an optional and non-revolving cost, it’s best to wait until you have enough cash reserves for this purchase,” Shinar said.
3. Fixed costs versus variable costs
Fixed charges, such as rent, are constant from month to month, while variable expenses depend on the direct sale of goods or services. Shinar noted that fixed costs can generate a high percentage of income at first, but as you increase, their relative cost becomes negligible.
Project your cash flow
Another important aspect of financial planning for a startup is to project the company’s cash flow. Bill Brigham, director of the New York State Small Business Development Center in Albany, New York, advised new business owners to project their cash flows for at least the first three months of the company’s life. Brigham said adding not only the fixed costs, but also the estimated costs of goods and the best and worst case income.
If you borrow money, make sure you know not only how much you borrowed but also the interest you owe, said Brigham. The calculation of these costs focuses on the revenues needed to keep the business viable and provides a good image of the cash needed to start it.
Gerberge recommended starting a business without borrowing at all, if possible. The loan puts a lot of pressure on any business and its owners because it leaves less room for error, he said. Once your business is underway, use QuickBooks or FreshBooks, which can connect directly to a bank account, to track expenses throughout each month and during the tax season, Shinar said.
Discover your financing methods
Once you have determined your costs and cash flow projections, you will need to consider how to continue funding. The way you get funds will affect the future of your business for years to come. Personal savings, family loans and friends, bank loans and government loans and grants are just a few of the many types of potential sources of funding. Many companies are funded using a combination of sources.
One place to get help is SCORE, which advises small business owners. Formerly known as the Service Corps of Retired Executives, this voluntary organization joins the Small Business Administration and offers training and workshops for people who want to become entrepreneurs. Most importantly, SCORE offers advice to people who have been in the company you wish to wish and who know the specific problems you will likely encounter.