How to determine how much finance your new business needs
One of the significant challenges that any new business faces are making sure it has sufficient funding. These finances do not only need to be enough to get the business up and running successfully but, ideally be enough to cover any unplanned circumstances too.
Most people are aware of the disheartening fact that 50% of businesses fail within their first five years, but, many don’t know why this is. Not having a business plan that appropriately assesses a business’s financial needs is one of the biggest causes of these failures.
Calculate Financial Resources
Combining costs with the financial resources the business might already have is the best way to determine a shortfall in funding. Once the amount of shortfall is known, a business can then look at the possible investment options available. The list below shows just some of the ways a new business can secure these funds.
1. Personal Investment. These can come in the form of cash or personal assets that can be used to secure cash and can either be put forth by the entrepreneur, or another individual.
2. A Business Loan. Companies such as Biz2Credit offer business loans that are fast-acting and require a relatively simple application process, making this option preferable to traditional banking for many start-ups.
3. Outside Equity Investment. Social enterprises or businesses with high growth potential often benefit from this form of financing, it can come from angel investors, accelerators, or venture capital funds. These forms of investment usually require a share of equity in return for investment.
Create a Budget Based on the Business Plan
The business plan should state clearly the basis of a business budget, providing all the necessary information such as predicted growth, sales, long term strategy, and market competition.
Forecast Sales and Expenditures
Since, for many start-ups, outgoing costs greatly outweigh incomings for the first few years, it is particularly important to consider specific expenditures.
Once an overall budget has been created based on growth predictions, it is then time to focus specifically on the cost of individual sales and expenditures. This can include but is not limited to; the cost of employment, equipment, and rent for an office space or warehouse. These costs should be predicted not only for the initial expenditures but for what the outgoings will be for each month. It is always better to be pessimistic rather than optimistic when it comes to predicted sales since this type of revenue is rarely ever certain, and you will likely face hidden costs.
Allow for a Contingency Fund
Assess worst-case scenarios and make forecasts for their financial implications. A contingency plan will make sure all possible costs that may not have already been considered are covered in the overall financial plan. Besides, such a practice will help to identify risk factors, enabling an awareness of trigger points.
Creating a realistic and detailed financial plan can be the make or break of any young business. It will not only ensure there is the appropriate funding available when it is needed but can also help to inform the overall progression of a business.