More than half of the new businesses that start this year won’t be around in two years. They will be out of business. A big reason for that sobering statistic is under-funding, starting with financial projections in the business plan. Projecting the financial needs for a new business is not the time for being overly optimistic or taking wild guesses.
So how do you tackle the financial section of your business plan? By applying three assumptions:
Revenue Targets Take Time to Achieve
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. Developing one to five-year projections will illustrate revenue growth revenue and when expenses are expected to be covered. Showing when you will be profitable heads off questions before they are asked.
Expenses Will Be More Than You Think
Research costs for labor, materials, space, transportation, equipment, etc., based on market rates and required quality. Worker costs should include the employer portion of payroll taxes (i.e., 0.0765%), benefits, licenses, training. Don’t forget back-office infrastructure, like payroll services, billing, financial management and reporting, tax preparation. Marketing could be expensive, depending on location and industry.
You’ll Need a Funding Cushion
Failure from under-estimating costs and over-estimating revenue can be avoided by building in a financial cushion. Initial funding needs should include an amount equal to six months or more of estimated expenses to cover payroll and overhead in the months when revenue is not enough to cover it. Of course, that’s on top of funding for equipment, legal fees and other start-up costs.
Tackling the finances in your business plan is not easy. Don’t take the easy way out by guessing or painting a rosy picture that probably won’t come true. Avoid being one of the new businesses that fails within two years by applying these three assumptions about revenue, expenses and funding.