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Reviewing finances for a new business

An important question you should as starting your new business is finances.  This article is intended to help you determined how much money you and your business will need to survive until your business becomes profitable.

How much do I need to survive?

Having a personal expense list is something that everyone should have.  This is especially important when you are considering taking on risk like starting a new business.  You will need to ask yourself; How much money do I need each month to survive for 6-12 months? I would suggest creating a list of all your recurring monthly expenses and determine an exact total. Don’t forget to include the water bill that shows up every three months. Below are ordinary expenditures that you may consider accounting for:

  • Loans – any recurring loan, house mortgage/rent, cars, motorcycles, rvs.
  • Utilities – electricity, water, gas.
  • Food – grocery, dining out.
  • Transportation costs – gasoline, cash for maintenance and repairs.
  • Leisure – ensure you set aside a budget for things to do.  Even if it’s just a beer budget
  • Emergency fund – an emergency can be anything from a hospital bill to tires on a car.

Once you calculated your expenses, you can see if extra cash will be available each month to put toward the business.  Depending on the type of business you are starting, will determine if you can take a “grow as you go” approach or if you will need a bank loan.  I am a huge advocate of having minimal debt, so if you can get by without borrowing money, then do so.  Another optional is to save for a year or two, and then start your business.

How Much do I need to start my business?

Determining how much money you will need to start your new business requires some consideration.  I always suggest pretending that your looking from the outside in, and try to visualize different components of your business that will cost money.  Sometimes splitting these items into categories will help you identify and visualize cost areas.

  • Business Facility (Home, Office or Retail).
  • Initial Overhead – Permits, Buildout, etc.
  • Recurring Overhead – Rent, Utilities, Insurance, Etc.
  • Payroll Overhead – Employee wages and accountant fees.
  • Material or equipment required – What do you need to operate.
  • Aquisition Costs – How much does it cost to acquire a customer.

The list above will need to be further broke down into individual costs, which I like to call components.  These component are item level one-time or recurring expenditures.  Based on your business needs, Components can be purchased in new or used condition to conserve cash.  For example, you’d like to open a new pizzeria in your town.  There are a couple of buildings in the area; one is vacant, the other is a bakery with an oven.  Which one should you choose?

Perhaps using a T-Chart will help.

Using a T-Chart for making decisions

A T-Chart is an excellent tool for making good business decisions.  They are super simple to use and even easier to understand.

Here’s how you create a T-Chart

  1. Drawing a large T shape on a piece of paper.
  2. Write “PROs” on the top Left; provide all benefits of making the decision.
  3. Write “CONs” on the top Right.
  4. Start asking your self “Why is this a good idea” AND more importantly “Why is this not a good idea”.
  5. Write down all PROs and CONs that come to mind.
  6. The goal is to see if the total PROs outweigh the CONs.

Below is a simple example of how a T-Chart may you decide if the existing oven in the bakery is worth replacing with a new state of the art oven.

Conclusion

Starting a business is a lot like owning a home.  It involves itemizing costs and determining wants versus needs.  When done correctly, there will be extra money available that can be used to grow the business or be distributed to the business owner.

 

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