Finance before fun!
Starting a business can be exhilarating but also exhausting.
The start-up phase has a number of moving parts and you need to work your way through various rules and regulations. While the right business structure is important, you also need the right accounting software program, adequate and appropriate insurances plus a brand that appeals to your target market. You also need to dot the i’s and cross the t’s on your contracts and property lease. Don’t forget your marketing plan including your website and social media channels. There’s a lot to cover!
Enthusiastic entrepreneurs are usually in a hurry to convert their idea into income, but they can sometimes put the cart before the horse. Before you pull the trigger on your business idea you need to make sure the business is financially viable. If it doesn’t pass the financial test, then all the other things don’t matter. For that reason, your cash flow budget and business plan should be high on your list of priorities.
Cash Is King
In business, failing to plan is planning to fail so you need to prepare a cash flow budget for your first year of trading. Consider preparing figures based on your best and worst-case sales scenarios. It’s not easy to project your revenue when you haven’t opened your doors, but you can’t afford to wait for more certainty regarding your sales projections and costs. Remember, a positive cash flow is a necessity if your business is to succeed and positive cash flow just doesn’t happen, it needs to be planned.
Any new business owner that fails to accurately forecast their cash flow for the first 12 months could find themselves on a collision course. Without realistic cash flow projections, management cannot identify future cash shortages and a bank won’t look favourably on a request for additional funding in the early stages of operation. When preparing your cash flow budget, you need to make a number of assumptions regarding the financial performance of the business and these assumptions must be supported by research, available data plus known facts such as rent and forward contracts.
The information in your cash flow budget is designed to:
- forecast your likely cash position at the end of each month
- identify any fluctuations that may lead to potential cash shortages
- plan for your taxation payments
- plan for any major capital expenditure, and
- provide prospective lenders with key financial information.
Of course, positive cash flow alone is not enough. The business must be returning a profit and the long-term trend for both must be positive. All too often we hear of profitable businesses that collapse due to insufficient cash flow. As accountants we can do some financial modelling for you and produce cash flows based on different price points and scenarios.
Preparing a cash flow forecast starts with projecting your sales. You’ll need to make assumptions on pricing plus you’ll need to factor in things like the seasonality of your business and the state of the economy. From a cash flow point of view, you need to think about how quickly you’ll get paid after invoicing your customers. Ask yourself, if you expect to be paid in 30 days what would happen to your cash flow if that blew out to 90 days? Would you need to borrow more from the bank at that point? Extending your overdraft or sourcing extra loans after a few months of trading would set off alarm bells at the bank.
Once you are comfortable with the revenue projections it’s time to focus on the costs. You need to dissect your start-up costs into categories like the office or shop fit out, equipment, IT expenses, professional fees, marketing costs, website production and furniture. You then need to look at your fixed costs like monthly rent, insurances, rates and internet. Finally, look at the costs that vary based on your sales including wages and material inputs. Cash flow projections can be a jigsaw to put together, but you are the most qualified person to make all the sales and pricing assumptions. You’ve researched the market in your industry, know your competitor’s prices and have developed your points of difference.
Business Plan
The main reason most entrepreneurs produce a business plan is to raise finance from a bank. As you would expect, a lender will want to know all about you and your proposed venture and the business plan provides all this information in a logical and structured format. It allows potential investors to evaluate your ‘pitch’ and make an informed investment decision. However, your business plan should do more than just satisfy your investors. It should prove the financial viability of your business and provide an overview of where you plan to take the business and how you intend to get there. It can be expressed as a series of objectives and then detail the strategies, tools and people who are going to make it happen.
If you are contemplating starting a business, the evaluation and establishment phases can be periods of great anxiety due to a combination of excitement, uncertainty and financial risk. The preparation of a cash flow budget and business plan provide a road map and set your financial expectations. You can then monitor your progress and performance. Do your homework, stay calm and as accountants we are here to guide you through the process.
