Understand business finance
Sure, you’ve got the idea and the work-ethic, but have you got the business finance knowledge to make your new business a stayer? Give yourself the best chance and plan ahead.
Getting Started
Firstly, you should figure out how much money you’ll need to set up your business. The benefit of calculating this figure is that you’ll be able to compare it to the amount of start-up capital you’ve got saved, and see how much money (if any) you’ll need to borrow to get up and running.
Your set up costs will include things like equipment and fit-out, any registrations and licences, accounting fees and an amount for working capital to cover day-today operations.
Initial Forecasting
To save yourself any potential headaches, it can help to have an idea of how much you plan to make and lose over the next 12 months.
Profit and Loss
Map out your predicted sales and expenses for the next year. While this may prove difficult initially, as you’re dealing with potential sales not yet made, work with what you know, such as fixed costs like goods and services you’ll need and your fixed costs of doing business. This will give you an idea of your likely margins.
Cash-flow
Cash is the lifeblood of any new business, so having an idea of your predicted cash-flow is vital. Keep in mind that customers and vendors may be slow to settle up with you at times, so allow for a bit of flexibility in this forecast.
Everything you need
12 months in
You should now be able to see a clearer picture of where your new business will be placed after the first 12 months – this is your balance sheet forecast.
Your balance sheet forecast should be based on the purchases and expenses you accounted for in your set-up costs, as well as the results of your profit and loss forecast.
Breaking Even
With your fixed costs in mind, you should work out how much revenue you’ll have to bring in to break even, and make a profit.
If you’ve got an idea of what your pricing is likely to be, this will be easy to calculate based on your predicted sales numbers.
Some advice to keep in mind when predicting your sales:
Service Businesses
If operating a service business, outline an ideal number of hours you want to be working each week. Be careful not to assume all your time will be available for chargeable activities (somewhere in the region of 70% utilisation is common)
Goods/Other Businesses
For goods/other businesses, determine the size of your market and opt for a conservative estimate of your market share
Account for good and bad
You should be careful not to rely on one single forecast – a better approach is to calculate a best and worst case scenario.
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