Starting a business can be a fun (and daunting) experience. Most people start with the idea and overall business model – but there is much more to think about than that. It’s the boring stuff that is often overlooked but it is also extremely important. The idea is just one part of running a business.
In this article we’re going to discuss and touch upon things you might not have considered when forming a business and we’re also going to look into how to make your working capital work for you via positive, planning cash flow and ultimately making the right financial decisions so you and your business comes out on top and sustains some level of longevity.
All businesses typically start the same way. You have an idea for a product or service and gauge that there is a target market who may be interested in it. From there you set about buying your stock, developing your service and marketing it to your target audience. But, there is much more to consider than that and depending on your current financial situation there may well be other things to consider.
If you’ve got a backup income, significant savings and can keep your head above water with your own funds during the early stages of running your business then getting finance probably isn’t going to be a huge concern. If however, you do need funding to get off the ground then there are a number of things to think about.
The Business Plan
Yes, the dreaded business plan. If you have ever tried to get funding for your project from a bank or credit union, you’ll know all about this. All lenders will ask for a proper business plan that provides an overview of your business, income and expenditure and forecasts. This will be used to determine whether you’re an acceptable credit risk. Getting credit as a business is a LOT harder than simply being an individual.
Planning For Contingencies
One of the primary reasons for a business failing is lack of management of working capital. Every piece of income and expenditure needs to be documented. You need to know what your stock, staff, management and overheads cost specifically against what you’re bringing in. You don’t want to wake up in a years time and see you’ve been losing money all the while.
You also need to plan for contingencies. Business will not ALWAYS be great. Even the biggest companies in the world today have gone through challenging times. You need to make sure that not only are you putting a bit away each month for your tax liabilities, you should also be careful what you take out of your business as you don’t want all your liabilities paid but to be at zero after a bad month of income.
As touched on above, taxation can often become an issue. Primarily as it’s typically due quite a long time after the income has been made. The correct thing to do is calculate your tax liabilities each month on going and then when the time comes you have all the income saved. But lots of people simply bury their head in the sane and worry about it when it becomes due. Which is fine if you have the working capital to do that but can be disastrous if you’ve over spent throughout the year and have a downturn in income come tax time
Estimations and Projections
The best way to manage your working capital is to not only record what is coming in and out but to estimate, forecast and project what is likely to happen one month, 6 months or even a year later.
Most businesses typically have an upward trajectory in respect of income so forecasting is usually a straight forward process. You can then use this to take some calculated risks in order to grow your business effectively. No business has ever come big by playing it safe. Risks need to be taking but by estimating and projecting your future income and managing your working capital properly you can take the sting out of the risk factor significantly.
Hopefully this wasn’t too off putting. I can imagine thinking about business plans and planning for the worst case scenario can take some of the fun out of starting a new venture. But it shouldn’t do. If you have confidence in your business model I am sure it will become a success but there is no harm in planning for the future and managing your finances properly. If done right, particularly with regards to forecasting, tax planning and forecasting you can actually end up with significantly more money than you do already and now to me, that means making your working capital work for you effectively.