Learning how to evaluate your business usually starts with the most important aspect, your finances. As we all know, money is the foundation of any business
If you’re an aspiring business owner or entrepreneur, you’re probably anxious to get things started. After all, the world is waiting for your product or service to hit the market, right?
That may be true, but before you announce a launch date, you’ll need to take a good, honest look at the most important aspect of owning a business: your finances.
That’s because money is the foundation of any business. Sales generate the revenue needed to offset the many expenses of operating a business. And those expenses begin long before you celebrate your first sale.
So before you get to far along, evaluate your finance needs by following these simple but important steps.
Assess Your Financial Situation
Take some time to think realistically about your financial situation. You need to know exactly where you stand: what you have now, whether you need additional capital and how prepared you are to seek loans or other funding.
- Prepare a budget: A budget includes all expenses, from the costs to produce your product or service, to start-up expenses, such as attorney and CPA fees, licenses, marketing, rent, utilities, and web expenses. You’ll also need to project income from sales for the next several years. Estimate your living expenses, as well.
- Estimate cash flow: Cash flow is the analysis of all the money that comes in and goes out of the business. First, estimate your monthly income and expenses, accounting for variables. For example, sales may be stronger during the summer, while certain expenses are higher during the winter months. Include any annual or semi-annual payments, like insurance or lease payments. Then, create different scenarios to see how unknowns, such as a month with only 75% of projected sales or 15% higher expenses, affect cash flow. Is projected revenue enough to cover projected expenses? For any months with negative cash flow, you’ll need additional money to cover expenses.
- Analyze your plan: After running all the scenarios, is it clear that you have the capital to start and fund your business? If you need additional capital, will you use your personal savings, or borrow from a bank or a family member? Will your business plan and cash flow analysis appeal to a lender? Will you need to bring in a partner?
If you decide you’ll need to seek additional capital, then start planning right away.
Ask the Right Questions
Before you make an appointment with an investor or lender, ask yourself the following questions to evaluate your needs:
- Do you really need more money, or can you better manage cash flow? Can you trim expenses or cost of goods?
- How urgent is your need? You’ll get better terms if you are asking in advance, rather than seeking loans under pressure.
- What sort of risk do you present? All businesses have risks, but if you present a lower risk, your lending terms will be better.
- What do you need it for? Be prepared to specifically explain your needs, and exactly what the money will be used for.
- How is the industry doing? Are you in an industry that is strong and growing, or trending downward? Knowing this will help you prepare your funding request.
- How will your financing needs affect your business plan? Any lender or investor will want to see your business plan and how the additional capital will affect it. Be very clear on financing both the start-up and growth phases.
Now that you’re clear on your needs, the next step is to review your options.
Figure Out Your Financing Options
Any start-up requires adequate capital to get goods and services to market, as well as to fuel growth and expansion. When you need additional funding, you’ll probably choose between the following:
- Friends and family: If you don’t have sufficient funds to launch your business completely on your own, you could augment your savings with loans or investments from friends or family. Or, you might consider applying for a personal or consumer loan at your local bank.
- Equity funding: With equity funding, shares of ownership in your company are sold to investors. They may be private investors, venture capital firms or equity partners acquired in a private stock offering. Advantages of equity funding include the ability to raise permanent capital with no repayment obligation, and outside expertise when you need it. Disadvantages are the higher expense associated with selling shares, diluted control of the business and the requirement to share profits.
- Debt funding: Most small businesses use less-costly debt funding for raising capital, including:
- Personal loans from a bank, life insurance policy or credit cards.
- Business loans, such as term loans (paid over a longer time period), demand notes (due in full in a short time, such as 90 or 180 days), lines of credit (which offer more flexibility) or government-assisted loans (such as Small Business Administration or SBA loans). Most require the business owner to have their own money invested, in order to share the risk.
- Operations-related funding, such as leases, vendor credit and customer credit, which is dependent on day-to-day business operations.
Getting the money you need to launch your business takes the right preparation. Gather the information you need, do your homework and figure out exactly where you stand. Once you launch your venture, stay on top of cash flow, so you have a clear financial picture throughout the life of your business.
