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An idea for a new business is exciting. It's also a nerve-wracking journey you need to be prepared for. You need to be sure the idea is a good one and that there's a market for it. There are also legal aspects to navigate, plus capital and funding considerations. Pulling it all together into a comprehensive business plan with set goals is a great way to bring the idea to life. Here you'll find articles, guides and tools to take you through the journey.
The excitement of launching a new business is a high point in the path of every entrepreneur. However, that excitement is often accompanied by anxiety over financial worries. Once you’re satisfied that the market is large enough to support your new business and that of your competitors, and you feel confident about your ability to win over consumers, it’s time to figure out your start-up costs to determine the affordability of your new venture.
In the excitement of launching a business, many entrepreneurs underestimate how much it will cost to start, not to mention how much cash you’ll need to keep the business going until you reach the break-even point.
Don’t make this fatal error. When you take the time to analyze your financial situation and project your start-up costs at this stage of your business plan, you’ll know how much working capital you need to get started and survive until you turn a profit. Another prudent step is to analyze the rate of return you’ll receive on your personal investment in your business.
New entrepreneurs often use their personal savings or mortgage their homes to obtain start-up funding. Ask yourself these questions before you take out a personal loan to start your company:
It’s impossible to know exactly what it will cost to get a business up and running. However, you can establish a reasonable estimate of the costs. Try to be as accurate as possible in your predictions so you don’t underestimate. A realistic forecast of your start-up costs will give you the confidence and peace of mind that comes with being able to meet your business expenses. Your forecast will also help you create a timeline for important milestones like reaching the break-even point.
While you may already have a list of start-up costs in mind, it will help to write them down or type them into a spreadsheet. Seeing your figures in black and white and doing the math will help you make important distinctions between essential costs and merely desirable ones that can wait.
Oftentimes, you will be able to research costs to get close to an exact estimate. Make sure to leave a cushion in your budget anyway, as some expenses will inevitably be more than you expected.
Your organizational cost encompasses all the expenses required to get the business legally organized. This generally requires the assistance of professionals and is an area where costs are frequently under-estimated.
Organizational Costs may include:
When most entrepreneurs think about startup assets, they think of the machinery and equipment required to get started. But that’s not all--startup assets also include the beginning cash balances and the investment in inventory required to get started.
Capital costs include:
While most startup companies do a reasonably good job of projecting the capital costs, they often under-estimate the costs associated with acquiring equipment and getting everything operational.
Cost that are often missed include:
Try to be resourceful when acquiring startup assets. For example, do you have to buy a new or top-of-the-line item or could you buy second-hand equipment instead? If the equipment won’t be used frequently, consider leasing it to save upfront costs.
Startup expenses include both one-time expenses to get the company started and those expenses that are required to be covered before your new business becomes profitable.
Startup expenses often include:
Working capital is defined as the amount of cash you need to keep the lights on until you break even. Raising your setup costs is the first challenge, but for your business to survive its first year you must also have enough working capital to cover ongoing expenses until you have sufficient business to generate a profit.
When you’re coming up with your working capital estimate, be sure to include both fixed and variable costs.
What if you could view next year’s business account statements today? This is what a cash flow forecast tries to achieve. The more accurate you can be in predicting your future bank statements, the stronger your financial management of your company will be.
As the name implies, a cash-flow forecast predicts how much money will flow into and out of your company. Ideally, your monthly income will be greater than your monthly overhead costs and accounts payable obligations.
Don’t fret if you spot a potential cash-flow shortage. This is common among start-ups and identifying cash crunches is a primary reason for doing the forecast. When you see it coming, you can meet with your business banker to discuss loan or credit line options.
Since you don’t have a cash flow history yet, you’ll have to estimate future sales with market research. It’s easier to identify costs because you can get a quote from suppliers.
Your cash-flow forecast should cover the first year of your business. Try to create three different estimates:
If you go ahead with your business plan, you’ll be able to update your forecast with real numbers from your first year in operation. Then you can use those figures for future cash-flow forecasts.
Every business has its own unique cash cycle. Simply put, this is the time it takes for your product or service to become a paid sale.
For example, a retailer usually receives money from customers immediately (people don’t usually buy a pair of shoes and arrange to pay the shoe store later). Conversely, it could take an electrician a month to finish a job and six weeks to see payment.
Whether you collect payment right away or sell on credit, make sure to factor your cash cycle into your cash-flow forecast.
This is especially important for seasonal businesses, such as a summer lawn service or a retail store whose sales peak during winter holidays.
Be sure to make provisions for ongoing expenses, staff, equipment, and other assets you’ll need to grow your business. You also need to figure out how often you’ll pay yourself a salary from the profits.
Now that you have a complete grasp of your start-up costs, cash-flow forecast, and cash cycle, it’s time to move on to the details of preparing a cash flow statement and determining if your business is profitable enough to be feasible. Read the next article in our series: “How do you forecast sales for your start-up business?”
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