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Bravo! You are reading this guide because you want to start a business. No doubt you have already thought about writing your business plan. For the process of writing your business plan, you may have identified a need to hire employees, purchase inventory, and/or acquire assets such as land, office space, furniture and equipment. All of this may occur prior to your new business generating any revenue. For reasons such as these, new businesses are in need of startup capital.

The next step is to quantify how much startup cash you will need. You start by assimilating a budget and projecting income and expenses (which will lead to cash flow). These projections of future revenue, expenses, cash flow and necessary capital are commonly called Pro Formas. Then you will be able to identifying the start up cash necessary to begin operations. These topics are just a few that you will need to cover in a detailed financial and capital plan which will be a vital section of your overall business plan.

As an overview, the financial plan will provide projections for income, expenses and funding sources. As you develop income statements that project income and expenses over the course of the first three to five years of your business operations, don’t assume that the venture will grow linearly. There may be an increased rate of revenue caused by initial market penetration, seasonality, effective product differentiation or the like. Or, sales and revenue may be flat for an initial period of time as you development a client base, make sales calls or attempt to differentiate your product. Similarly, an increase in expenses may not perfectly track an increase in revenue. This may be caused by a lag in new revenue after incurring new expenses such as hiring additional staff. Also, like revenue, expenses may be seasonal, but may be incurred long before realizing an increase in seasonal revenue. This could be caused by increased advertisement in anticipation of seasonal sales. You should not assume that revenue and expenses will perfectly track a straight line.

 

Once you have properly projected income and expenses, you can identify key points where incremental funding may be necessary. If expenses are greater than revenue for a short period of time, you will need to draw on retained earnings or outside financing. You must identify these periods of time and plan accordingly. A proper analysis will allow you to adjust your financial plan to allow for funding at various stages. You can obtain the best financing terms when you anticipate your needs, rather than looking for money under the pressure of negative cash flow. As you develop your projected income and expense reports, avoid being overly optimistic in your revenue projections.

No doubt as you analyzed the competition and researched your market, you will have gained valuable experience concerning the industry. Use this knowledge to make your projections. In doing so, lenders or outside investors will feel much more comfortable knowing that your projected cash flows are based on sound, historical, industry trends. In fact, it is best if you include different sales scenarios for your investors. This will require you to identify the parameters that most affect the revenue and expense projections.

Are these parameters outside of your control? How likely will each of these parameters occur? Which have the most effect on your projections? How sensitive to your bottom line are each of these parameters? The last thing you want to have happen is to be sitting at the bank and have questions asked of you that you have not considered. Force yourself to go through this exercise and you will be better prepared to answer these questions.

After you have made sound projections, you are ready to estimate the amount of capital needed to commence operations. You must also contrast the advantages and disadvantages of financing your venture through debt or equity. Make sure your initial capital needs are supported by your income, expense and cash-flow