Financial Planning for a New BusinesBrian Jang ON November 15, 2020
Getting a new business up and running involves a lot of planning and decision-making. The early days of a business tend to be fast-paced and energetic. Unfortunately, sometimes this flurry of activity causes new business owners to underestimate the actual costs that they will incur. As a result, they run out of steam and the business might suddenly be in danger of failing.
Creating Your Budget
Approaching your budget in the same manner as a projected cash flow statement might be useful. This means calculating your starting balance, your anticipated monthly operating cash, and your monthly expenses. Try to determine how long it will take you to start having a positive cash flow (earning more than spending) and how much working capital will be required to pay your bills until then.
To do this, you have a few steps ahead of you. You will need to know the prices and estimated sales of the services and products that you are selling and will need to review your sales funnel to determine your conversion rate at each step.
Follow this up by estimating the total anticipated expenditures for each month. Detail all expenses such as taxes and rents, whether their costs are fixed or variable. Will you be buying equipment, or leasing? Think ahead to your marketing costs, taxes, and any other expenses that come to mind. Once you have a total in mind, deduct it from your estimated income to have an idea how much revenue you will earn each month.
Determining Your Startup Costs
It is helpful to create a detailed worksheet. This will give you a better view of your true startup needs. Be as detailed as possible. For example, list everything that you will need to purchase to open your business. This should include everything, including things not related to your business, such as office supplies. The more detail you can provide, the more accurate this will be.
Each business is going to have its own unique expenses, but there are certain broad categories that will be common to them all. These include ongoing costs such as utilities, one-time costs, essential costs such as your website, optional costs, fixed costs, and variable costs. An example of a fixed cost might be the leasing of equipment, while variable costs could include the hiring of temporary subcontractors.
Some other costs that you will want to consider include:
- Computers, printers, software, and other specialized items
- Website domain name, hosting, development
- Branding, business cards, brochures, logo creation
- Utilities, phone costs, security deposits on your lease
- Legal fees and any required permits
Traditional office space can be quite expensive, and quite often, furniture such as desks and chairs are not included. The same holds true for filing cabinets and other items. Try to account for any potential hidden costs. If you contribute equipment to the business, be sure to itemize them to deduct them from the total amount.
For those who are not prepared to lease their own office space, an option worth considering is a coworking space. In addition to being affordable, coworking spaces provide you with everything you need for your business, such as a boardroom and meeting space, digital meeting centre, personal desk, lockable storage, landline, Wi-Fi, secure server storage, and more. They also offer the ability to grow with your business, and you needn’t worry about lease-breaking fees.
Coworking spaces have evolved to deal with the current COVID-19 situation and follow rigorous cleaning standards and social distancing protocols.
Projected Profit and Loss
As the name suggests, your projected profit and loss is meant to take your estimates and apply them to the future. You begin by estimating your future revenue each month for the next 6 to 12 months. Once you have that, calculate your estimated variable costs. These costs can include materials, supplies, packaging, and more. Labour costs will not typically be included unless you sell services, and you expect the costs to fluctuate based on the number of projects you are working.
Subtracting your monthly variable costs from your estimated monthly revenue will give you your gross profit. From this amount, you will subtract all your overhead, including your salary, accounting fees, and a coworking desk to determine your net profit.
By forecasting your profits and losses in this way, you can estimate how long it will be before you will see any profits. You might find that you have overestimated your sales, in which case you will have to adjust your take-home salary which covers your living expenses. Because of this, it’s recommended to have at least 6 months of savings to fall back on until your sales are sufficient to cover all expenses.
Adjusting Your Estimates
You will need to monitor your estimates carefully to see how they compare to reality. You may need to make changes as you go along, raising prices or cutting costs, or by putting more hours into acquiring sales. Watch your cash flow to ensure that you are able to meet obligations such as paying suppliers and covering other expenses, while still meeting payroll. If you are doing better than you projected, your business may need to grow by hiring new employees or subcontractors, leasing a larger space, or otherwise expanding.
Making these estimates to project your budget can help your business succeed by helping you avoid problems in cash management and will allow for more accurate estimates of revenue and expenses. By effectively managing the cash flow of your business, you are laying a stronger foundation for your future success.
Need help with financial planning for your business? Contact BCJ Group today.