Understanding The Finances Of A New Business
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Obtaining startup funding for a new business often reflects an overall estimation of costs. Investors tend to look for such realistic financial projections in the entrepreneur’s business plan since it contains, among other things, an outline of exactly how their invested money will be spent. The financial plan section of the business plan should also be supported by market research, illustrating a solid return on investment. While developing the financial forecast, an entrepreneur needs to ask him/herself the following questions: Is the sales forecast plausible? Are the projected margins achievable? Are the working-capital needs being taken into account? How much are the capital expenditures?

Realistic financial forecasts
In developing the business plan for a newly-formed company, an entrepreneur needs to ensure that all financial predictions are made as realistic as possible. It is essential that the forecasting revenue for the new business exhibits more than just the projected income for a given business year. It should also reflect the targeted level of sales for the product(s) and/or service(s) offered by the new business as well as projections of market penetration.

Every business investor is looking to not only fund a unique business idea but to also collect profit from their invested company. Therefore, an entrepreneur needs to plan ahead when developing the financial forecast in order to ensure that their business and financial plans comply with the standards of investors and lending institutions.

The financial plan section of the business plan
The financial forecast or financial plan is a crucial part of the business plan that most angel investors and venture capitalists look for. It comprises of three main parts: the balance statement (which summarizes a company’s assets, liabilities, and shareholders’ equity at a specific point in time), the income statement (estimates the profit made and lost during a fixed period of time), and the cash flow statement (reflects the estimated amount that will flow into and out of the company during a fixed period of time).

Many inexperienced entrepreneurs have the tendency to embellish the financial estimates with impractical figures and poorly conducted market research, only to be rejected for capital by prospective investors. In order to avoid such mistakes, business owners need to understand that a financial plan takes a considerable amount of time to create. Any figures provided in a financial plan should be practical and supported by proper market research on how those projections were made. When presenting their financial estimates, entrepreneurs should be prepared to address all inquiries that potential business investors may have. This not only increases their chance of raising the desired capital but also gives them the credibility among investors that they conducted their own due diligence for their new business. A positive financial forecast is also essential for winning over lending agencies such as banks or when requesting micro loans from the Small Business Administration.

Estimated startup expenses vs. operating expenses
In addition to the company’s financial estimates, there are also several anticipated costs that entrepreneurs need to consider. Start-up expenses are any fees that can be applied prior to the launch of a company and the period of time during the early stages of a company’s development. These expenses may include any down payments/deposits for the property, equipment, and set-up fees required for the launch of the business. It can also comprise of any licenses or permits that are needed to run the business as well as company-related registration fees.

Operating expenses are costs associated with sustaining the company throughout its development. Some operating costs to keep in mind are office rent and utilities, office supplies, computer equipment and technologies, and telephone lines, to name a few. In addition, there is also the cost of hired professionals (attorneys, accountants, marketing experts, etc.), employee payroll and benefits, and individual worker and company insurance to consider. Business-related travel and office-related events are also significant expenditures included in this group of expenses.

While many may assume that startup and operating costs only include business-related expenses, they often forget that personal expenses of the entrepreneur should also be taken into account. Basic living costs are a type of operating expense. Such costs may not be quite as extensive as other business-related ones but these costs are a financial figure that should never be underestimated. Some basic living expenses include the entrepreneur’s rent or mortgage, car payments, gas, clothing, etc. Both startup and operating costs should be estimated for about one year and computed in the financial plan.

For more information about startup costs, please refer to our startup resources

There are many different costs to consider when starting a new business. They can include startup expenses (deposits on property and equipment, licensing and permit fees, etc.), operating expenses (company rent, office supplies, employee payroll, etc.) as well as financial projections (regarding the sale of a company’s products and services, and overall company revenue). All anticipated costs should be well-documented in the financial plan section of the business plan since investors and financial institutions rely on these figures when lending money to prospective entrepreneurs. The business owner must keep in mind that these figures should be as realistic as possible and that their invested capital should show a solid return on investment. One can conduct independent research when preparing their financial plan or hire a skilled professional who can tailor their financial plan according to their field of industry.

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