Every
new business needs some money to start operating. Yours is no exception.
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Before venturing into self-employment, you need to conduct adequate
investigation to ensure that your proposed business stands a chance to
succeed. You need to know how much it will cost you to run your business and
how much money you are likely to make. Remember your reason for pursuing a
business idea is to make money.
The capital requirements of a new business will vary depending upon
several factors. It is important that these factors are carefully analyzed
to avoid underestimation of financial resources needed. No one wants
surprises along the way, and most especially, you.
Many entrepreneurs, even with good product or service, fail in their
business attempts because they underestimated the capital requirements in
the beginning, resulting in capital squeeze and forcing owners to close
down.
Your initial capital needs will be determined in great part by the type
of operation that you are starting. A manufacturing firm will need more
funds than service firms. Other needs that need to be considered include
location of the enterprise, current and projected economic climate,
product/service to be offered, credit policies, etc.
Here are four steps to help you better understand your financial picture:
Step One: List
all Possible Expenses
Prepare
a list of all cost items, dividing the chart into two sections: the one-time
start-up costs and recurring monthly costs. One start-up costs include
fixtures and equipment, decorating and remodeling, installation of fixtures
and equipment, deposits with public utilities, starting inventory, licenses
and other professional fees, advertising and promotion for opening, and
others. Monthly expenses could include salaries and wages (if any),
insurance, rent and utilities, advertising, supplies, interest payments for
loans, maintenance and others. It is advisable to have your accountant or
lawyer assist you in completing your chart to help you in making accurate
estimates.
Once capital needs have been determined, the next step is to identify
where you can obtain the necessary funds to commence operations. If you have
no possible source of funds whatsoever - no savings, no possible loan
sources, bad credit history - it is best that you wait awhile and postpone
your plans to open a business until your financial situation improves. You
need money to make more money - this has been true a hundred years ago as it
is right now.
First place to look for your funds is your own pocket. Start by taking a
personal financial snapshot. How much money do you need and how much money
do you have? How much of your own money can you invest in the business? To
help you determine the figure, you can set-up a personal balance sheet. List
all your assets and their value--cash, savings, checking accounts,
securities (bonds, stocks, and mutual funds), car, personal assets, and so
forth. Next, list all debts--credit cards, rent, monthly bills, student
loans, car loans, and any other loan.
You are in pretty good shape if your assets exceed your liabilities,
especially when you need to apply for a bank loan or other business credit.
However, if you have more liabilities than assets, you should consider
paying off as much debt as possible before plunging into business. Starting
a business amidst tight personal financial situation is simply no way to
make a go at it. Too many credit card debts or outstanding loans can put a
damper on things. Starting a business while you are overwhelmed by debt may
force you to make irrational decisions in the hope of making a quick buck or
two.
Step Two: Build
a cash cushion
Investing
in a business idea is a risky proposition. Before putting your entire nest
egg into your venture, you need to make sure that you have some cushion to
fall back on when things go south. The rule of thumb is to set aside about
six months' worth of living expenses to fall back on during lean times.
If you have a family and you are the breadwinner, you need to at least
make sure that you have funds to cover at least a year of their projected
expenses. If you are employed, you need to start saving now while reducing
debt. Otherwise you will have to figure out how you can make more money from
your venture. You can also opt to stay at your current job until your
finances are in order. Always plan on everything in a start-up business to
take twice as long and cost twice as much as you expect. If a client says
"I will pay you in 30 days," you should plan for having to wait 60
to 90 days until you get your money. Always think through a contingency
plan.
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Step Three: Prepare a Budget
You will
be performing a balancing act between living expenses and start-up costs, so
it's critical that you determine from the onset just how much money you are
willing and able to set aside to get your business off the ground. Calculate
how much money you need to start your business. Don't forget to include the
cost of your living expenses during the start-up phase! While smart
entrepreneurs know that they need to scale down their lifestyles during the
start-up plan, don't assume you can live on bread and water until the
business starts to make a profit. Living too harshly can distort your
judgment and dampen your spirits.
Remember that you cannot start a business today and expect to realize a
huge fat profit the following month. When creating a start-up budget, it
should include your initial capitalization plus your basic living expenses
until you realistically can expect profits. You need to know if your
business needs $15,000 at the start and you expect to reach your break-even
point after six months, then your start-up budget should be as much as
$30,000 to cover basic living expenses and how much you need to run the
business. When calculating how much money you need to earn to cover all
living expenses, don't forget to account for taxes, health insurance, and
other additional costs.
Step Four: Do a break-even
analysis
Know
when your business will reach break-even point, which is when your gross
profits equal your fixed costs. At this point, you're neither losing nor
making money. This is an efficient way to determine how many products you
need to sell to stay in business-and just how much you need to invest in it
before you make money. Look at your short-term and long-term finances. The
former is about 12 months; the latter is between two and five years. You
will have to survive the short-term to make it to the long-term. The average
business owner makes somewhere around $30,000 to $40,000 a year in salary.
About the Author:
Jenny Fulbright is a
staff writer of Power Homebiz Guides.
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