Starting a business can be hard work, but often the most challenging part of the journey is raising the money required to make a start. Raising finance requires careful planning, as a thorough fine-tuned financial plan will significantly boost your chance of obtaining investment and launching a successful business.
Predicting revenue and expenses can however be difficult for start-up businesses. With no trading history or previous references to work from, it is easy to make incorrect assumptions, which means the margins for error are quite wide. Taking the time to create a strong plan for your finances should therefore be one of the first things you focus on.
Here at Business West, when we are assessing an entrepreneur’s suitability for a start-up loan, we like to see a financial forecast which includes not only income and expenditure – your best estimate of what will happen to your business financially – but also a cash flow projection.
Here are some of the most important elements of a financial plan your start-up should take into account:
Capital Requirements / Start-Up Costs
These are your essential start-up costs and are the things without which you cannot start the business. You may have already purchased some capital items, stock or raw materials or be injecting some capital into the business yourself and these need to be reflected in the accounts.
Personal Survival Budget
If you’re planning on applying for a start-up loan you will need to present a Personal Survival Budget. This is your monthly expenditure against your monthly income and provides lenders with a clear idea of the level of “drawings” you will need to take from the business.
2 Year Cash Flow Forecast
Probably the most essential section of the financial forecast for a start-up business, a cash flow forecast highlights the cash position of the business at the end of each month. As explained below: cash is king and therefore is the most important thing to consider when starting a business. But beware! Cash flows do not always occur as smoothly as you may think!
The break-even analysis of your start-up outlines the point at which your sales volume or revenue is high enough to cover your overheads, including both fixed and variable costs. It’s an integral part of your start-up business plan, as it will help you determine how much you need to sell each month, and at what price, to break even.
Your balance sheet provides a snap shot of the financial position of a business, including information on what the company owns and owes at that point in time. Being able to create and understand the balance sheet for your business will help you stay in control of your finances and recognise how your start-up is doing.
“Cash is King”, profitable businesses can and do go bust. Just because you are making a profit does not mean the businesses bank account is healthy. This will depend on your creditor and debtor payment terms as well as the revenue model you use within the business. But taking the time to monitor and improve your financial plans will reduce the risk of your business failing.