Every business needs to have a detailed, almost forensic, knowledge of their finances. If you do not know the state of your finances, and where you want them to be in the future, how could you possibly go about organizing them? This planning is key for even the most experienced entrepreneur, as the image of a business genius who works on instinct alone is very much a fallacy. The image of a successful figure working on wits and instinct alone is what one of them would like for you to think of them. In reality, there is a lot of hard work going on behind the scenes to plan and achieve these multinational successes. Here we look at some of the key aspects of finance and funding as a guide for the new entrepreneur to follow.
Assess Start-Up Requirements
To accurately know what the best path to follow for your business journey, then you need to know what start-up requirements are needed for your enterprise. The simple answer to this question, as always, is money! But how much, and what to spend it on? Detailed start-up planning is essential. Make a detailed list of what you require, and research the best deals for each item, property, or member of staff. A key point to remember here is that the cheapest option is not always the best value. A piece of equipment that is half the price but lasts a quarter of the time is not a positive business purchase. The same applies to staff as it is prudent to pay top dollar for the best people, but do ensure you are getting excellent experience, skills, and contacts if you are going down this road.
What Resources are Immediately Available to You?
Sometimes it’s important to use what is already in front of you. You must have resources that you can utilize for free. Maybe you have extensive industry contacts you can use to contact new customers or get advice on how to navigate tricky contracts. There could be more physical assets you haven’t considered. Think about using your existing car rather than buying new expensive vehicles, where possible? If you have staff then you can pay them mileage rates for use of personal vehicles. Home-working is also fast becoming normalized, and as a start-up, this can save on extensive real estate costs.
Business Structure: Future Planning
No-one has a crystal ball, and the future is never certain. However, the smart entrepreneur will nonetheless have a business plan that details exactly where they intend to go, how many sales they will require to achieve this, and how this will be achieved. Just as relevantly we need to know what level of resources are required to realize this achievement. Advertising, staff, and logistics costs must all be estimated, and potential profits projected.
Using Your Own Money
Many invest their own money when starting a business however you need to ask yourself if this is the correct strategy? You are risking losing some, or all, of your hard-earned cash. A good exercise is to work out how much you would earn by saving your money, check out this handy TFSA calculator can give you an idea. Then compare that to what investing the money in the business would do for you. Look back at the business plan we talked of earlier and use it to decide on this.
Loans & Their Details
The most obvious alternative to using your funds is the traditional business loan from a high street bank. If your company takes out a loan, then it’s important to factor the affordability of the repayments into the financial projections and ensure your cash flow is adequate. Often the bank will require some collateral, and especially if you are a new business. They may look for personal guarantees on any loan. What this means is that in the result of the business failing you would then become solely liable for the full outstanding balance due. You should be aware that in this case your personal credit score may be taken into account when deciding on the loan.
Are Investors Right for You?
If you are uncomfortable with either of the funding models we’ve discussed, then there is always the option of finding external investment. Many ask friends or family to put some money in, and in return, they either get their money back with interest or a cut of the profits. The big downside is that if the business does not perform then it could create arguments that are difficult to resolve. An alternative option would be to find an ‘Angel Investor’ these are individuals with vast business experience as well as funds. You will gain invaluable advice alongside your investment if you pair up with the right angel.
Consider Used & 2nd Hand Plant or Equipment
If you are still struggling to make the finances work there are other ways to save some money. When starting, or at any point, it can be a good idea to consider second-hand equipment or machinery. Even such things as shop fittings or IT equipment can save you money. The real decision is to work out how long it would be till the second-hand items will need to be replaced, you can then weigh this up against the purchase cost and see if it makes financial sense?
What if You Get nto Trouble?
With the best planning in the world, we can never be 100% sure that everything will go in our favor. So it’s a good idea to have an exit strategy in the event of your reasonable worst-case scenario. What will you do? Will you be able to sell off enough assets to satisfy any creditors? It is for this reason that you must maintain your financial books with up to date information so that you can diagnose any problems as early as possible to limit the extent of the damage.