A business’ cash flow is the blood of every business. Without it, your business dies. That is why it is very important that you have a hold on your personal AND business finances at all times. Cash flow documents should be created and could determine whether or not you are qualified to receive a business loan. Above all, you’ll most likely need a business plan to get through the door.
A balance of cash inflow (sales of goods or services) and outflow (necessary business expenses such as marketing, employees, equipment, or business loan payments) is important also for determining fixed and variable expenses your business may foresee in the future.
Fixed expenses and variable expenses are two separate financial categories and both are essential to an operating business. Fixed expenses include rent, utilities, administrative and insurance costs. While variable expenses refer to inventory, sales commissions, shipping, packaging or any costs directly associated with product or service sales.
For business owners who are exploring financial options to fund your first business should understand that every business is different and will have specific budgeting guidelines at each stage of the business’ development. There is no secret formula for measuring an exact amount of seed money you will need to get your startup off the ground.
Some businesses will be able to get off the ground with a relatively small amount of money while others may require a much greater amount, considering any additional building renovations or top of the line equipment that may be needed.
A good way for first timers to estimate how much seed money they will need for their first business is by creating a mock financial spreadsheet for the cash flow of what two months of business may look like during actual operation. Keep in mind that some expenses, especially for a brand new business, will be one-time costs for things like a license fee or to pay for a building marquee sign.
You will also need to factor in ongoing costs for utilities, inventory, rent and insurance. Try to only calculate expenses that are realistic and essential. Your startup business budget should only include the necessities.
It’s very important to have a detailed and down to earth copy of your budget if you are planning on borrowing money from a lender to cover costs during the first stages of your business (LivePlan is an excellent tool for doing so).
Borrowing startup funds is one of the most common ways first time entrepreneurs just like you get the funding they need. However, lenders are tough with their selections and getting them to say yes to even the smallest loan isn’t always easy.
Before you start looking for a lender, it’s best to always do your research on who may be the most approachable lender for your business. You should also understand some of the factors a lender will use to evaluate your proposal. Banks and lenders will want to see concrete proof of your ability to pay back the loan as well as a current credit history report and a solid plan for your business.
They will also want to know if you have any equity or collateral to go toward the amount you are asking for and what your experience is within the industry.
It cannot be stressed enough how important it is to check your personal credit history if you are approaching a lender for a loan, especially if you have not yet established a business credit history. (If you have not yet established a business credit history, a bank lender will use your personal credit report to determine your eligibility)
Also, you should be prepared for any questions the lender may ask you about your business, as your answers the result of their decision. For example, a lender might ask a first time business owner about cash flow and if or not, it is greater than debt.
They might also ask how you plan to pay for the loan if the business fails, how you plan to control expenses and what is the probability of increasing profit related to your business’ industry.
Everything that is left over after all of your costs have been paid for at the end of the week, month, or year is what will qualify as your profit, or breakeven analysis. If you are eligible to receive a business loan, payments should be calculated out before you add up any profit.
The breakeven mark is reached when a business’ revenue surpasses all fixed and variable costs. To estimate your breakeven analysis you may use the following mathematical equation:
Fixed Costs (divided by) [Unit Selling Price – Variable Costs] = Breakeven Amount
If your breakeven analysis numbers are higher than outflow numbers, banks will generally be more comfortable funding your first business.
If you need additional help in initiating loan approval or evaluating your credit report, it would be a great idea to speak with the nearest lending representative or ask your accountant for more information.