One of the best ways to ensure the success of any business is to get help from a financial planning expert. Without working out how much you can spend on each aspect of the business so that you stay within your budget, you can easily overspend, or not spend enough on the most important elements. If you are not used to doing this – and many people aren’t – a professional financial planner will be able to help you.
Most financial advisors would tell you there are 5 main steps to plan the finances of a business.
- Work out your set-up costs. These will include costs such things as: licences and registrations, accounting fees, equipment and fit out and the initial working capital. When you deduct all your costs from your investment equity, it will give you a ball-park figure for what you need to borrow.
- Work out the profit and loss for the first year. This may seem difficult, but you can get a good idea of expected sales by looking at The profit and loss statements of several similar businesses, often available online. Include the costs of the goods sold as well as the cost of doing business. Work out what your profit is likely to be and watch to see if it is accurate as the year advances. Adjustments may be necessary.
- Create a cash flow forecast. Once you know what your profit and costs are likely to be, you’ll have a good idea of your cash flow. A new business – more than an established one – may need cash to service their customers. But the customers may be slow to pay, which can leave a gap in your cash flow unless you prepare in advance with enough to tide you over. A poor cash flow forecast has brought many a business to its knees.
- You need a break-even analysis. Having worked out your fixed cost of doing business, you can then work out what revenue the business needs to bring in to cover it. If your business provides a service, work out the number of hours worked per week, but remember not all hours worked are billable to clients. For a retail business, work out the size of the market in your area and what your market share is likely to be.
With the analysis, it’s good to work out more than one, using worst cast and best case scenarios as well as an average. These should be updated regularly to come into line with your business performance and your current knowledge. You will be able to see quickly where your business stands financially and be able to take measures to change it – i.e. get more customers – if it starts to move towards the worst case scenario at any time.