Opening a business is an exciting new venture for entrepreneurs, but much of the time, small business owners fail due to careless errors and lack of preparedness. Startups small business need, first of all, a financial plan. Sounds basic but, how to do it and where to start? Here we propose you six easy steps you can take to create a financial plan for your small business.
Create a Financial Plan in 6 Steps
1. Create a business bank account and get a tax ID
It’s difficult enough to keep track of your personal expenses, and when you mix your business income with the money in your checking account, things can quickly get out of hand.
That’s why before you even open your business, you should already have a business account on its own with some money thrown in. Then, apply for your Employee Identification Number (EIN), a.k.a., your business tax ID or ITIN. If you forget, and you’re operating as a corporation or partnership, you can get into a lot of trouble with the government.
2. Get capital
You’re going to need money to finance your startup, but what’s the best way to find it? There are actually multiple ways to finance your small business, and it really just depends on your personal style and how much money you’re currently worth. Here are a few popular ways entrepreneurs fund their startups:
- Self-Financing – This can be risky, but there are multiple ways to accomplish your financial goals on your own. Whether you tap into your money market accounts, make use of business credit cards, or take out a bank loan, almost any would-be SMB owner can finance their business solo.
- Friends & Family – Many entrepreneurs run into bad luck when trying to go it alone – let’s face it, life happens, and that savings account can suddenly empty out after an emergency. So, it’s not a bad idea to ask close friends and family for their help. In fact, you wouldn’t be alone; 68 percent of SMB owners have tapped into their immediate network to obtain funds. Just be confident it’ll work out, or else your personal relationships could suffer significantly.
- Venture Capital – VC firms invest directly in companies that are first starting out in exchange for equity stakes. If you choose this option, keep in mind that the competition in this market is high, and they tend to pick those companies that show the most growth potential.
- Small Business Administration Loans – These are commonly utilized loans that are offered by qualifying banks, nonprofit lenders, and credit unions. One popular loan is the 7(a) Loan Program, which offered an average of $337,730 in 2012.
The above are just four ways to finance your business in its early stages. Explore here other alternative options to finance your small business!
3. Calculate expenses
What is the real cost of starting a business? Total expenses can be easily underestimated at the beginning of a business, so make sure to itemize every single thing you might need to spend money on as you’re first starting out – after all, this can be revised later as your business finds its footing. Here are just a few of the expenses you’ll want to consider for your startup:
- Office equipment
- Office supplies
- Web and logo design
- Pre-opening marketing
Once you have the numbers, add these to your assets and recurring costs that keep your business going, and you will have your startup cost. You can also check out the Wall Street Journal calculator that help get you on the right track.
4. Create price points and profit margins
Figure out how much you’d like to make in profits. Once you decide how much you’d like to make in profits, you’ll have to create a price point for your product that covers the expenses incurred in making the product and gives you the profit margin you’re looking for. Not sure how to price your products or services? Follow these simple tips. And don’t forget to add taxes to the equation for an accurate number.
5. Build a budget
Building a budget is essential for the good health of your business. Take a look at the expenses such as product equipment, utilities and other services you pay for in order to maintain the business. Insurance and rent are major expenses for many businesses as well. Keep the budget in an Excel spreadsheet and factor in other items such as savings and an emergency fund. As a business owner, you really don’t know what to expect: in the beginning stages, you may spend more money than you might have anticipated. For this reason, it’s really good to have a financial cushion to make sure that the business is covered.
6. Factor in advertising and promotion
Advertising and promotion are essential for growth within a company. Because of this, it’s so crucial for a small business to have a designed amount in the budget to cover marketing. Most small business owners underestimate the power of a marketing budget to run the right ads and get in front of the right people. Thankfully, sites like Facebook and Instagram have excellent advertising programs that aren’t nearly as expensive as creating a commercial. They work in the favor of the startup companies. However, it’s still important to know that you’ll get much farther as a company if there is a specified monetary amount to cover effective advertising and marketing campaigns.
In the end, you have to plan for where you want to go. It’s important to factor in sustainability and growth for the company. Once you do this, you’ll have an easier time focusing on outsourcing, product creation, and customer engagement. Before you know it, your small business will be making big financial moves.
Alex Briggs is a contributing author for Wages & Benham.