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:
- 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.
- 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.
- 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.