Embarking on a business venture of your own is liberating and exciting, but the first year for any startup is crucial.
Around 10% of startups fail in the first 12 months. To make sure you don’t pour your hopes down the drain, you have to be financially planning effectively in those early days.
Those vital first few months can be a fraught period. How well you cope financially often determines whether your business will thrive or flop.
However, there is a little more to it than simply crunching the numbers; there is much to consider to be able to handle uncertainties and have a winning strategy to set you up for success.
Fortunately, by carefully laying the foundations with solid financial planning and effective budgeting, you can manage resources – regardless of how limited they might be –, prepare for the unexpected, and pursue your dreams. Today, we’ll discuss how.
Calculating Startup Costs
Your startup costs form the basis of your budget, but the initial expenses need to be thoroughly understood. If not, then you risk overspending on things you hadn’t planned ahead for, or worse – underestimating your financial needs.
You must think long and hard about where you’re going to allocate resources to be able to figure out your funding needs.
Expenses
Everything that you require to get your business launched needs to be included in your initial expenses. That includes all equipment, any licenses or legal fees and the space you need to do it in – whether bought or rented.
Don’t overlook things such as software subscriptions and website hosting to make sure you have no nasty surprises.
If the budget already seems overwhelming, then look at where you can cut costs to begin with. Remember, there is no shame in starting small; 1 in 3 begin their small business with less than $5,000.
Fixed and Variable Costs
When you are noting your expenses, it is wise to classify them as fixed or variable. Renting office space, for example, is a fixed cost, whether it is monthly or yearly, whereas your raw materials will likely vary according to supply and demand.
By dividing them, you can better track your spending and resource allocation, making your budget easier to adjust if necessary.
Revenue Projections
In terms of assessing viability, accurate revenue projections are the best way to form a clear framework of your financial goals and expected income.
When starting out, revenue projections are important for securing funding, but they can’t be pie-in-the-sky figures. Instead, it is best to adopt a flexible approach to forecasting and stay realistic with financial goals.
Start Conservatively
Startup ventures are fuelled with ambition and optimism, but your projections need to be backed with solid market research. They should reflect realistic sales figures that take into account how long a new brand can take to gain any traction.
Plan With Multiple Scenarios in Mind
When preparing your projections, use a “best-case vs worst-case” framework and then find your average. Planning for a variety of scenarios helps prevent hiccups down the road.
Monitoring Cash Flow
No matter how high the revenue potentially is, the best-laid business plans can be thwarted by terrible cash flow management, so you must prep ahead.
Your inflow must be faster than your outflows, or you risk driving your business straight into the ground. It is no use having thousands of customers waiting on a product if you can’t buy the raw materials to manufacture.
Tracking Inflow & Outflow
Keeping a financial record of inflow and outflow allows you to spot patterns and adjust to make sure your profits aren’t bleeding straight back out.
Set Aside An Emergency Reserve
You can plan for just about every scenario, yet an unexpected cost may still come along. To prevent disruptions and setbacks, always set aside some emergency funds as a safety net.
Tech & Tools to Leverage
When you embark on a startup venture, you are soon juggling – and the financial management aspects can be overwhelming for some. To streamline processes and make sure you aren’t forgetting anything, why not leverage tech and tools?
Budgeting Software to Consider
Humans make mistakes, and human error in financial planning can be a fatal mistake for startups.
Platforms such as Mint, Monarch, QuickBooks, and Wave can help reduce errors in managing expenses; they can also make invoicing easier, and provide accurate reports.
Online Security Tips
Don’t forget: with financial planning comes the risk of sensitive data, so make sure you also leverage the right technology to help safeguard the information.
A VPN Chrome extension can easily help protect your network with encryption to ensure that your data stays safe while you access online financial tools.
Be Prepared to Make Adjustments
Remember your budget isn’t set in stone, just as the market itself wavers, so will your budgeting. For that reason, it is important to regularly review your financial plan and be prepared to adapt.
Review & Analyze Performance
Comparing your performance with your budget helps identify discrepancies and figure out what needs adjusting where.
Changing Conditions
Revise your budget and adjust it as market trends, customer behavior, and operational needs change to make sure you stay on track with your goals for success.
Conclusion
Budgeting properly in your first year is a make-or-break skill for any business startup. The financial planning strategies you put in place are ultimately what drives your venture and, more often than not, determine its success.
Costs must be understood fully to put the right strategies in place to cover yourself. Most important is the ability to adapt to changing markets, which requires regular review and analysis.
But, with careful financial planning following the tips in our guide above, startups can navigate the inevitable challenges, as well as the unexpected, while capitalizing on the opportunities that arise along the way.
