Plan your resources = increase your odds of success!
Proper financial planning is the foundation of a successful business. If you are a small business owner or think of launching a startup, you should first dedicate some time to creating a cash-flow system, which will sustain your future endeavors. In this article, we will talk about how financial planning will influence the stability of your company and how you should prepare for the potential expenses that will come along the way.
Why are cash-flow systems so crucial for the success of startups?
If you are operating a small business, the chances are that you are taking money out of your pocket to finance your idea. Even if you have found an investor, the funds that you have provided on your startup timeline will not last for an eternity. This is why the only way to scale your company effectively is to create a working cash-flow system, which will take care of the manufacturing, delivery, and human resource expenses each month. So, without further ado, let’s take a look at how you should manage your financial planning.
Creating liquidity and redirecting your income
When conducting expert financial planning, your first entrepreneur test is finding an effective stream of income, which will cover most of your (if not all) periodic expenses. To do that, you must evaluate the profit you should make to keep the company going. You can do that through the following steps:
Calculate manufacturing and delivery expenses
Depending on the type of business you have started, you will have certain expenses that will go towards creating a product or a service. The manufacturing costs include all the money that will be invested into this process.
If you are producing a physical item, begin with estimating the costs of the raw materials needed. Account for the required machinery and facilities that you will use along the way. After that, summarize these expenses and write down your estimation.
If you are offering services to your clients, try to think about all the payments that will go towards creating this service or providing it to the end-users. These usually include the expert work invested into utilities and the expenses that will go for logistics.
Evaluate marketing costs
Every successful business is heavily dependent on quality marketing. To sustain an effective cash-flow system, you should carefully think about the different types of marketing that you will indulge in to promote your product/service. The marketing costs include paying for advertisement, conducting promotion campaigns, and providing free samples of your product to users. Estimate the money that the company will channel for marketing and write it down.
Plan for taxes
Planning for taxes depends on what type of product you are offering to your clients and under what regulation it falls. If you are offering services, taxes will be calculated as a percentage of each sale. Most of the taxes will still be conducted on a singular basis for physical items, except for those needing government-issued licenses for selling. Depending on which country the business is operating in, different tax rates will be charged on each transaction. You can check those either on the website of the specific government financial institution or in their local offices.
Estimate the number of sales you will do for a set period of time (preferably monthly)
After you have calculated the manufacturing and marketing costs, it is now time to look at the potential sales you will make each month. These will be the foundation of your cash-flow system and business plan builder, so you should try to objectively estimate the number of individual deals you will make regularly. One of the best ways to do that is to conduct a test offering for several days. After that, calculate the average amount of sales per week and estimate the gross number of offerings that will come for the first month of operation.
Then, subtract the marketing and manufacturing costs from the total amount of money that you assume to make from sales during the first month and write down the sum that is left. This will be the funding that you will have available for further investment in the company and paying out additional expenses.
Account for employee’s salaries and outsource costs
If your business strategy includes hiring employees or outsourcing some of the work, then you should also include these expenses in your financial planning. To do this, it is highly advisable that you use a sheet on which you write down each individual payment. This way, you can objectively evaluate the total amount of funds you need to dedicate to experts each month. After you do that, subtract this amount from the net monetary assets left at your disposal.
Find/Readjust a competitive price for your products/services
If you have diligently followed the steps above, you already have an estimated evaluation of the financial planning of your company. If your expenses happen to be more than your gross income, then your startup will be ‘burning’ money each month. In such a case, you have two options before you.
The first is to adjust the price of your product/service to turn your cash-flow system positive. This means increasing the cost of your offerings to the point where you won’t need any additional funding to keep the company operating (and scaling).
The other option is to find outside funding, covering the cost of your main processes until your business strategy starts paying off. In this case, you must first decide how you should find further investment and decide which amount will be sufficient to sustain your activities.
Finding additional streams of income will also help you continue expanding your reach and value, so think about other ways in which you can monetize the product/services of your company. This can give you stability and allow you to scale your project further.
Financial planning emergency savings
If your cash-flow system is actually providing you with sufficient resources to continue your work without having to worry about funding, then you should think about adding some safety measures for your company. One such method is establishing an emergency fund.
Setting up an emergency fund is essentially preparing the company for a potential crisis, in which you might require immediate liquid backup to keep the operations intact. This way, you can be sure that unpredictable external factors will not disrupt the core processes of your business and lead it to bankruptcy. Try to set aside a proportion of your net income each month into a specific bank account, which you will use only in case of emergency. Preferably, you should have enough funds at your disposal to keep the company going for about 3-6 months.
Conclusion – How financial planning can help you achieve success
Financial planning is a complex process, which includes managing all the internal processes inside your startup to keep the expenses to a minimum and assures a steady flow of funds each month. If you follow the steps that we have suggested above, you will gradually learn how to manage your finances properly. Ultimately, you will understand how to create a reliable funding structure, which will help you scale your business to new lengths and achieve long-lasting success.