Starting a kingdom business is one of the most exciting and challenging things you will do in your lifetime. The thrill of creating something and building it into your dream is something that few people get to truly enjoy.
However, given the failure rate of business start-ups is so high, it is critical to plan the financial details as thoroughly and accurately as possible.
The most common reason for business failure in the first few years of a business is poor management of cash flow.
THE THREE MUST-HAVES:
Before launching your new venture, here are three of the basic necessities:
- Pre-Launch Budget—A basic outline of what it will cost to establish the business.
- Budget—A basic projection of revenue and expenses over the first 12 months.
- Cash Flow—Similar to the budget, but evaluating the cash movements in and out of the business on a month-by-month or quarter-by-quarter basis.
No.1 Pre-Launch Budget
Your pre-launch budget is about creating a detailed projection of all the start-up costs to get your business to launch. It is not about the ongoing expenses once you are running but about the costs associated with getting you to launch.
Here is the most important question to answer for any start up: aside from the start up costs, how much money are you going to need to live on to maintain your basic living standards whilst getting the business off the ground?
Here is the tough reality, most businesses take about twice as long to get off the ground than the entrepreneur predicted.
Determine how long you will take to get started and for how long the business will take to get to the point where it replaces your old income. Then, double it! It ALWAYS takes longer than people predict.
The pre-launch budget should be done as part of your initial business planning process and should basically list all your upfront costs.
Typical start up expenses:
➢ Plant & Equipment
➢ Office Equipment – including IT
No.2 Budget Projection
The initial budget differs from the pre-launch budget by focusing on the ongoing expenses in the first 12 months (and even beyond). A budget should allow for the projected revenue inflow and the projected expense outflow. What you are trying to determine as accurately as possible is how much does the business cost to run on a monthly and annual basis.
The big question is, will your business run at a surplus or at a loss? Almost all businesses start out as loss-making as they seek to build their revenue. The challenge is to get the business to profitability as soon as possible.
Typical expenses to include in the budget:
➢ Office or factory rent
➢ Phone and communication costs
➢ Motor vehicle expenses
➢ IT expenses
➢ Marketing and development expenses
➢ General office expenses
No.3 Cash Flow
Cash flow is very similar to the budget but takes it to the next level. It analyzes revenue and expenses but projects them on the basis of actual cash movement.
A Cash Flow Statement work on the basis of having a starting cash balance (your bank balance) less expenses over a particular time period plus revenue coming in resulting in your closing cash balance. In essence, you are adding timeframe into the equation. It is a powerful tool to:
- Determine which months will be cash flow negative (how will you fund them?)
- Which months are seasonally good or bad
- When you might run out of cash
- When your business will become cash flow positive