Finding Money to Start the Business

Next, you have to deal with the most important issue for a business startup: where to look for the money to start your business. You can use your personal savings; borrow money from family, relatives or friends; interest investors to put money into your business in return for shares; or borrow money from banks and financial institutions. However, before you withdraw money from your bank account, look for investors and visit the loan department of banks, you should do some mathematics and convince yourself that your business will be viable first. Otherwise, please do not take out your hard-earned savings for this business. Furthermore, you need not waste time with investors or banks. They are likely to ignore you.

Projected Profit

Businesses are set up solely for profits. The business will be considered profitable if the revenue for each year exceeds the total expenses. Profit is very important to fund your operations and provides the basis for investors to put money into your business and for banks to offer you loans. To determine the projected profit, a business needs to deduct the estimated total expenses from its projected revenue. It can check if its profit is healthy by comparing its projected profit with the industry average. Very often it will take some time before a new business starts to generate a profit. Hence, you should be as realistic as possible when generating your projected profit.

Projected Cash Flow

Entrepreneurs must project the monthly cash flow for the next six to 12 months into the business. They should convince themselves that they have enough money to pay for their business operations, suppliers and bank interests every month. Projected cash flow also helps businesses to set a benchmark for their in-coming and out-going funds. For new businesses, it is useful to have a projected cash flow statement for 12 months. During the building up stage, a business startup may incur losses but it must have enough cash to meet its monthly obligations. Otherwise, the business becomes insolvent.

It is good practice for an entrepreneur to prepare projected profit and cash flow for at least two business scenarios – the best and worst cases. The best case scenario shows projected profit and cash flow in the most ideal business situation. For instance, customers make the maximum number of purchases from you, suppliers do not increases their prices and there are no cheaper new substitutes which force you to lower your products’ price. The worst case scenario shows the opposite. If you can still generate a healthy cash flow even in the worst case scenario, then your business is likely to survive better in the early years. Investors and banks will also be more comfortable in putting their money into such a business.

Financial Ratios

Besides the above, there are some key financial ratios that entrepreneurs should be familiar with when starting a business. You should know that the:

Return on Equity (ROE) is the percentage derived by dividing profit by equity. ROE tells investors if they can make a decent profit when investing in your company and whether banks are willing to lend you more money. A high ROE relative to your competitors is preferred.

Profit margin is the percentage derived by dividing profit by sales. This indicator tells the banks about your ability to repay your loans as well as the risk profile of their loans to your firm. Investors will use this indicator as a gauge their probability of recovering their investments and perhaps even receiving dividends. A higher profit margin compared to your business rivals is something entrepreneurs must aim for.

Debt-equity ratio is used to measure the company’s debts relative to the shareholders capital. This ratio, which should ideally be kept low, helps banks to decide on whether they should lend you more money.

Inventory turnover ratio is derived through dividing sales for the year by the inventory. This indicator is particularly useful in manufacturing management. A high inventory turnover ratio suggests that there is strong demand for your product and that little stock is available in your inventory.