29 Mar How Important is a Financial Plan For a Small Business Start-Up?
If you are investing in a small business start-up, then congratulations! We assume that you have all of your finance organised and that you have written down your financial plan to ensure your success?
Well, you might or might not be surprised to learn that many small business start-ups don’t bother to put together a financial plan. This omission can cause them to over or underspend their capital, sometimes missing out on great opportunities and other times spending their capital in inappropriate ways.
Far too often we hear of small businesses closing their doors, simply because they didn’t have a handle on their cash flow. This can cause them to run out of money before they have time to make a profit. So to be a success, you not only need sufficient start-up capital to finance your business, but you also need to know how and when to spend your money.
This is what a financial plan will outline for your business, keeping you on track and helping you to spend your seed money wisely. Without such a plan, your ability to finance your start-up, can come swiftly to an end. So let’s look at 5 examples of how a sound financial plan can help your start-up to flourish.
Knowing where and when to spend your capital is vital to your success. Without a firm plan you can bounce around spending money like water, but not achieving much progress. Your financial plan will help you to prioritise your goals, highlighting where spending your capital is important and where it is not.
Long term planning
When you finance a small business start-up, you need sufficient capital to carry you for a number of years. Focusing just on short term goals and spending your capital too quickly can lead to failure. Investing in your long term goals however, can help to grow your business and to develop in the right direction.
Having key financial milestones for your business, helps to keep you moving forward. As each milestone is achieved or not, you will know which parts of your business are a success, which need more work or capital investment and which need to be reassessed and possibly reworked.
Most small business start-ups need an additional injection of capital to keep them going, and they usually apply to banks or other financial institutions for these loans. The problem is that you will need to show evidence of a sound financial plan to obtain further finance, as well as a full account of your expenditures, profits and losses since your start-up. This means that you need a financial plan from the very beginning, if you want to stand any chance of receiving additional funding.
The more employees you take on, the greater your expenditures. Your financial plan will detail how much you can afford to pay for staff, which in turn, will inform you on the number of staff you can employ. It is always a good idea to keep the number of employees to a minimum, as this frees up your capital for other vital areas. Many new start-ups outsource much of their work, as this is a strategy that helps them to keep their costs down.
As you can see, knowing when you are spending too much of your capital in one area is an important part of growing your small business. As is recognising when you need to finance growth, instead of ferreting your capital away for a rainy day. Clearly, you will need an emergency fund, but being afraid to spend your capital can cause your small business to fail just as easily as overspending in the wrong areas.
At Conrad Carlile, we specialise in helping small business start-ups with their strategic financial planning, as well as with many other accounting and tax services. Please call us on 07 3871 1522 or complete our online enquiry form for more information.