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Understanding The Finances Of A New Business

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

Conclusion
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.

Source

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