Planning Business Finances

History shows that typically, before the pandemic, more than half of new businesses will fail within two years. The main reason is because they run out of money. Their initial funding was inadequate, often because the owner started without a reliable budget or financial projections in their business plan. They don’t – or don’t know how to – do the necessary homework to learn the real cost of delivering their product or service.

Projecting the financial needs for a new business is not the time for being overly optimistic or taking wild guesses. It’s important to invest the time needed to research actual costs and develop realistic assumptions for revenue and expenses. The investment will really pay off.  

Planning business finances so you don’t run out of money can be done by following these three realistic assumptions:

  1. Revenue Takes Time to Ramp-Up

Even with a huge demand for your business in your market, achieving projected revenues will take time. Ramping up and making contacts does not happen overnight. Top potential revenue will not happen in the first year. Develop one-to-five-year projections to illustrate revenue growth and the crossover point when expenses are expected to be covered, adjusting as needed.

  1. Expenses are Always More Than You Think

Research the actual cost of labor, materials, space, transportation, equipment, etc., based on market rates and quality requirements. Worker costs should include the employer portion of payroll taxes, benefits, licenses, training. Don’t forget back-office costs, like payroll services, billing, financial management and reporting, and tax preparation.

  1. Build in a Financial Cushion

Avoid failure from under-estimating costs and over-estimating revenue by building in a financial cushion. Initial funding needs should include an amount equal to a few months of estimated expenses to cover payroll and overhead in the months when revenue is not enough to cover costs. Of course, that’s on top of funding for equipment, legal fees, and other start-up costs.

Planning business finances is not an easy task. Don’t take the easy way out by guessing or painting a rosy picture that probably won’t come true. Avoid being among the one-half of new businesses that fail within two years by applying these three realistic assumptions about revenue, expenses, and funding.

Goodbye 2020, Hello 2021!

Saying goodbye to the old year and saying hello to the new one is a time-honored tradition. Never has the tradition been celebrated with more zeal than this year, as we kiss 2020 goodbye. I don’t know anyone who wants to repeat the last ten months. People, especially business owners, are looking forward to 2021 with its promise for reaping financial benefits from their hard work, instead of working hard and barely keeping afloat.

Saying a firm goodbye to 2020 and a hearty hello to 2021is an opportunity to reflect on accomplishments and challenges from 2020, and to plan for goals and achievements in 2021. We don’t know what next year will bring. Conditions will change and we will adapt, but we need to plan no matter what. You know what they say…A goal without a plan is just a dream

Making a new plan starts with identifying an overarching change or improvement you want by the end of 2021. Need a new worker or system? Want to offer a new service or product? Follow these three tips to establish a plan and achieve your goals in 2021:

  • Gather the Numbers – Quantify your goals as much as possible. This task will require some research and could require making estimates and assumptions. For example, how much time and money would a new worker or system cost? How much of that cost would be one-time and how much would be ongoing? The more numbers you can nail down, the better.
  • Be Realistic – Know your market conditions and your resource capacity when setting your goals. It’s important to be realistic to help ensure that your plan is achievable. Setting unrealistic objectives is discouraging and could result in spending time and money on activities that are unlikely to succeed. Better to use those resources on realistic, achievable goals.
  • Adjust As Needed – No matter how well you research the numbers and focus on what’s realistic, the market conditions and other factors used to set goals and make plans will change. Periodically assess your plan and progress on meeting your goals. Are you on track? Why or why not? Based on the answers, adapt your plans and goals accordingly.

Saying goodbye to 2020 and hello to 2021is an opportunity to close the door on a year we don’t want to repeat and plan for renewal. It’s the perfect time to savor your achievements and to plan for a much better new year. Don’t let your goals turn into dreams that you never achieved. Establish a plan for 2021 and turn those dreams into your reality.