Finance 101 for Startups

Jun 15, 2012   //   by Helen   //   Blog  //  No Comments

Many new entrepreneurs focus on their product or service so much that they forget about the two basic requirements for staying in business:

  • Cash
  • Profit

Your business needs both cash and profit to survive. If you don’t have these, you don’t have a business. Make sure you are able to plan, record, monitor and respond to your financial situation every day. It is easy to get side-tracked with other numbers, but the business numbers that matter most are cash and profits. In our second week of the training and mentoring programme for Wexford tourism businesses, it was all about finance.

Financing your start up

You need a budget to work out how much money you need in the first two to three years in business. Longer forecasts look good, but in real life a five year forecast is simply too far ahead to be realistic for a startup. You will need a business plan, which is based on your research and knowledge of your business type before you can identify all the income and costs of your business. Only when you have this completed, can you work out your finance requirements.

Set Up Costs

Itemise and cost out your set-up costs before you start. Include legal fees, architects and building fees, website or other online development work, design work, uniforms, purchase of stock, equipment and fittings and don’t forget office fittings including printers and computers. Some of your business operating costs, such as marketing or insurance, may have to be paid up front as well, before you have any income. You can begin the habit of cash flow management from the outset, as some of your costs, such as insurance, can sometimes be scheduled over the course of ten months or a year, thereby relieving pressure on your bank balance.

Cash flows

Once you start to trade, money will come and go as you buy and sell goods and services. This will typically happen in irregular fashion; you might pay suppliers once a month, VAT every two months and have seasonal income, especially in the tourist trade. You need to pull your figures together into a cash flow forecast.

Common finance mistakes for startups

Wildly optimistic sales forecasts are the most common start up mistake.

Ignoring cash deficits – do you need an overdraft or longer term finance such as a loan, share capital or perhaps a grant?

Forgetting an expense type altogether, underestimating costs or forgetting to budget for paying yourself. You need to live too!

What do you think is the most important aspect of financing a startup? Please let us know in the comments below!

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