Are you prepared to launch a business? If your answer is yes, you are certainly not alone. Following widespread layoffs and resignations, the United States experienced a dramatic increase in new business applications, surpassing 4 million. While the COVID-19 pandemic may have spurred these entrepreneurial initiatives, the sustainability of these ventures in the long haul remains uncertain. Alarmingly, a survey conducted on entrepreneurs who emerged during the pandemic revealed that over half fear their businesses might not survive the year without additional support.
Even putting the pandemic aside, embarking on a business venture is inherently risky. Before the pandemic, statistics indicated that 20% of startups cease operations within their first year, with a staggering 90% facing closure within a decade. To ensure success, one must be ready to make significant sacrifices. Are you prepared to forgo a salary for several months? Are you at a point in your life where dedicating 60 hours a week to your business is feasible?
These are just a few crucial considerations to ponder before launching a business. To properly prepare and ensure you’re equipped to commence this entrepreneurial journey, it’s essential to develop a comprehensive business plan that addresses the numerous financial aspects related to establishing a business.
Why Crafting a Business Plan Matters
You wouldn’t arrive at an airport without a destination in mind. So why would you invest your time and finances into a business venture without a definitive roadmap outlining your goals, the strategies to achieve them, and a mechanism for monitoring your progress? (These are just a few reasons why drafting a business plan is vital.)
A well-rounded business plan comprises several key components:
- Executive summary: What are your overall objectives? What is your mission statement? How would you characterize your product or service? Later sections should include detailed information on your offerings (for example, suppliers, margins, etc.).
- Market analysis: What are the prevailing trends in your sector? Who constitutes your target clientele? Clearly outline how you intend to distinguish your business within the marketplace.
- Business structure: Who will oversee operations? What roles and responsibilities will they hold? What qualifications do they have?
- Marketing and sales strategy: How will you reach your target demographic and advertise your offerings?
- Business financing: What amount of funding do you require? How long will that funding sustain you? What methods will you use to secure it?
Securing funding is arguably the most crucial element of your business plan. Without proper cash flow and a sound financial strategy encompassing costs and expenses, your entrepreneurial venture will struggle to get off the ground.
Financial Factors to Consider When Starting Your Business
Recognizing that running out of funds is the top reason for startup failures, it’s essential to establish a financial plan before fully committing to entrepreneurship. To measure your financial preparedness, consider asking yourself these three questions:
1. Can I finance my business venture independently?
The notion of being able to independently finance your business endeavor can be quite empowering. Who wants to incur debt, right? Unfortunately, many aspiring entrepreneurs lack sufficient capital readily available.
If you don’t possess the necessary personal funds to initiate your business, you’ll need to explore alternative methods for raising capital. Start with your existing bank, as they are already familiar with your financial history. Loans from the U.S. Small Business Administration (including 7(a) loans, 504 loans, or microloans) are also excellent alternatives.
Some potential business owners turn to friends and family for financial support; however, this route has its own set of advantages and disadvantages. For instance, if you receive an intrafamily loan, the lender might want to charge a minimum interest rate to avoid it being categorized as a gift (which would incur gift tax). Additionally, this can complicate personal relationships, so approach this option carefully.
Bear in mind that the more collateral you offer for loans, the higher the risk involved. If you wish to minimize risk, use your personal funds. It may take longer to accumulate the necessary capital, but it will provide peace of mind by avoiding obligations to external sources.
2. Do I have a solid understanding of my personal finances?
Are you currently setting aside 15% to 20% of your income for your retirement savings? This is a good sign of financial security. However, starting a business usually means you’ll initially miss out on regular income to invest in retirement. To properly assess your financial stability, perform a thorough review of your personal budget.
You can use online tools such as BrightPlan or Mint, or manually review the last six months’ worth of statements from your bank and credit card accounts. Regardless of the approach, carefully examine your bills and identify areas where you can reduce personal spending. The more streamlined your personal budget becomes, the more resources you’ll have available for your business, promoting faster growth.
Before diving in, ensure you have enough savings to cover at least a year’s worth of essential expenses. It might take several months, if not years, for your startup to generate profit, and you need to ensure that your essential expenditures are covered while you work on your business.
3. What expenses will my business incur?
Certain startup expenses are largely dependent on the nature of the business (for example, a brick-and-mortar establishment, an online venture, or a service-oriented business). Others, though, are common across various business types and sizes. Consider collaborating with a certified public accountant to assist you in tracking your startup costs, segregating them into expenses and assets.
You can deduct business expenses from your taxes, but you must maintain accurate records. Categorize your expenses into one-time (like permits and licenses, website development, etc.) and ongoing (rent, utilities, etc.) to gain a clearer understanding of what it takes to operate your business. This approach will also enable you to uncover potential cost-saving opportunities over time.
As more individuals explore entrepreneurship today, you may find yourself asking: Am I equipped to start a business? However, it’s vital to understand what factors to consider before commencing a business, with financial health being the foremost priority.
Developing a financial plan for your new venture will significantly enhance your chances of success.
