How much business funding do you need?
How much business funding do you need? Knowing how much money you need, and for how long, will help you choose the right type of finance to go for. Here are some tips to help you arrive at a number.
Business budgeting tips It can be tricky figuring out how much money it takes to start, buy, run or grow a business. Here are some things to think about as you go through the process.
Starting a business
Building the business List all the things it will take to get started. Include things like building fit-outs, vehicles, equipment, uniforms, initial stock, website development, and promotion.
Running the business in the early days Figure out what it will cost to pay leases, salaries/wages, suppliers, and utilities from week to week. Your starting revenue isn’t likely to cover all that. How much more cash will you need?
Sneaky costs (that are commonly overlooked) Startups commonly forget to budget for things like permits, rental deposits, insurance, utility connections, bank fees, website hosting, marketing costs to boost initial sales, and transport costs. Don’t make those mistakes.
Wiggle room Things won’t go as planned so put a buffer in your budget. You may need it to hire staff if things take off, or costs may go up if a cheap supplier goes out of business.
Don't just get into business, stay in business It's easy to get preoccupied by the costs of starting (or buying) a business. Look beyond that. Ask yourself how much money it will take to run the business. Your revenue probably won't cover those costs in the early days.
Buying a business
Get a valuation A professional valuation will help you decide how much a business is worth, and it will tell you if expensive equipment is due to be replaced.
Check the books Have an accountant look at the past two years of business accounts to make sure it will make you money. Budget for an initial dip in revenue as customers adjust to new management.
Work out the cost of change Will you be rebranding, hiring staff, buying extra equipment, or trying new marketing ideas? Estimate the investment required.
Buying a franchise Some franchisors provide detailed budgets for buying and running the business, but that’s not always the case.
Running a business
What is a working capital loan? Day-to-day costs can be hard to cover if a big customer pays late, an unplanned bill comes in, or you have a bad month of sales. Working capital loans keep things running while you recover.
How often will you need one? You may think you only need working capital loans at random times, but look for patterns. If it’s regular and predictable, that may affect your finance strategy.
Avoid the high-interest trap Working capital loans are often short-term and flexible. Because of that, they’re high interest. If you need a lot of them, it will get expensive. Get an accountant to review your debt regularly. It might be worth converting some short-term debt to a lower-interest, long-term loan.
Growing a business
Make a budget List all the costs involved in making the improvements, item by item. Get an estimate for each. If you need to operate at diminished capacity while the changes are made, factor that in too.
The hidden costs of growth Work out what will happen to your operating costs after expansion. You may need more inventory or staff. Check your budget covers that, or that you can get a working capital loan.
Make sure it’s worth it Now you know the costs, figure out the return. Unless something’s going to improve your profits or make business easier, it’s probably not worth financing. Do a cost-benefit analysis.
Consider your finance options Could you finance it yourself if your vendors gave you longer to pay? Maybe you could negotiate a deal? Or your vendors may be able to provide some finance of their own. Explore everything.
Think about cash flow Remember that putting too much of your own cash into a purchase can backfire. If you run down all your reserves, you may have to take a short-term loan later and they have higher interest rates.
Get an accountant to look at your numbers
Getting finance always comes at a cost. An oversight here, or a miscalculation there can have big implications. Taking on debt or allowing investors into your business is a big deal. It’s great to run the numbers yourself, but consult a professional before jumping in – they’re the experts at budgeting and finance.
Some really useful content, originally published by Xero,