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If you’re filled with enthusiasm for a new idea, you may have considered setting up a new business. Entrepreneurs are the backbone of the economy. According to the Small Business & Entrepreneurship Council, businesses with 20 employees or less account for 89% of the U.S. economy.
Small businesses can create an impressive turnover or develop into a medium to large enterprise. With the right idea, good marketing and a solid business plan, the sky’s the limit.
However, starting a new business can be a daunting prospect. Statistics show that only two-thirds of new business will survive the first two years of trading and half will fail within five years. This creates a great deal of uncertainty and may leave you wondering whether or not launching a business is a good idea. While there are no guarantees in life, there are four financial questions that every entrepreneur should ask before they launch a business.
Related: How and Why Startups Must Protect Their Intellectual Property at All Costs
1. What are my business costs?
There are two categories of costs for a new business — initial startup costs and ongoing overhead expenses. It’ best to start out by assessing your startup costs. You will need to think about the things you absolutely need to get your enterprise off the ground and what you will need to get to the point of earning revenue.
You will then need to think about what you will need to pay out to keep your business moving forward. This will include overhead costs such as rent, internet service, phones, salaries and any other expenses that you will incur regularly.
It is crucial that you are as accurate as possible with these estimated costs. Take the time to do some research and don’t make assumptions. You can’t simply assume that your business phone plan will be similar to your domestic bill; many providers charge commercial customers differently. Just bear in mind that it is better to overestimate your costs at this stage — underestimating your needs now could lead to cash flow problems later.
2. What will my cash flow be?
Now that you have assessed your expenses, you will need to look at your potential cash flow or revenue. This is the money that will come into your business on a weekly, monthly or quarterly basis. Again, it is best to work to a worst case scenario here.
Although you may be full of enthusiasm and assume your business will take off like a rocket, it’s better to consider how it will fare with slow growth. This will allow you to calculate modest plans and have a nice surprise when your business starts to really grow.
Each business is different, but there are resources available to help you to calculate realistic revenue expectations.
3. Where can I get funding?
After you’ve figured out your financial projections, you can calculate how much capital you will need to get started. It’s a good idea to have six months or more of operating funds on hand before launch. Again, overestimating is a good idea to be on the safe side. Where you get your hands for this funding will depend on a variety of factors. The most common funding options are individual savings or help from family or friends.
However, depending on your business type, there may be assistance from government agencies. It may even be possible to seek funding from a venture capital firm or an angel investor. Small business loans can be a good funding source if you don’t want to use up all your savings, but there will be restrictions and criteria to qualify.
In many cases, entrepreneurs create a combination of these options to launch their businesses. Remember that you will need to manage both your own finances and your business expenses even once you’re up and running. You can’t simply put your personal finances on the back burner while you work on your business, as it could not only impact your credit score, but also compromise your personal financial goals. It is important to keep up with paying your bills, your retirement savings, building an emergency fund and keeping money aside for other financial goals.
You can build these things into your business plan and count them as operating costs of your start up, but if you choose not to, you will need to think about them when assessing financing options.
4. Where do I want to be in five or 10 years?
While you may have grand plans for your new business, it is important to consider this question in the context of your finances. Keep a set of personal financial goals and goals for your new business.
Develop a personal plan for where you would like to be financially in five years and what you would like to accomplish in 10. You can also take this approach for your business goals. Consider what you would like your business to look like in five years, and what revenue projections would you like to hit after a decade of trading?
Keeping a long term look at your business idea can not only provide inspiration, but it can help you to maintain focus on the day to day operations. The initial operation of a new business can be time consuming and frustrating. There will be things that don’t go to plan or may have a different outcome, so it is good to have a long term goal to keep you on track.
Financial goals will also help you to develop a big picture of where you stand and how your hard work can pay off in the future.
Related: Why Some Startups Succeed (and Why Most Fail)
Considering launching a new business can be exciting and a little scary. So, it is crucial to be realistic about the financial aspects of the business and how you can make it work. Many new businesses fail due to cash flow issues, making it vital that you don’t fall into this trap.
Taking a deep dive into the financials of a new venture can help you avoid unnecessary stress from the outset. Once you launch, you will have lots of things to consider, so why give yourself another challenge? If you are realistic about your start up finances, it may predict a longer journey to success, but at least you won’t fall at the first hurdle.