When it comes to small business finance, there are a million questions that come to mind, and a lot of blank stares when you try to find all of the answers. There’s no way you can become a master accountant or CFO overnight, and you will be quickly overwhelmed if you try. Instead, start with the basics and then work your way up. Here are some key small business finance questions you should ask as you get started:
What are my startup costs?
Nearly every time you begin something new it requires some upfront costs, including creating a small business! Before you start visiting banks and talking with investors, you need to itemize what your upfront startup costs are going to be. This means creating a list of required equipment and any other purchases to be made such as insurance and trade name registration. You will also need specific quotes detailing the costs of each item. Keep in mind that because of these upfront costs and the gradual nature of the sales curve, your cash flow will likely be negative for the first few months.
What are my fixed and variable expenses?
You know your startup costs, but now you need to estimate what your month to month expenses will be. This is Part 1 of an essential piece of your business plan: The Profit and Loss (P&L) Forecast. Your P&L forecast will help you plan your small business’s financial future and set realistic goals. In order to generate the most accurate forecast, you need to create a realistic list of both your fixed costs – costs that remain consistent – and variable costs – costs that vary based on sales and production. Knowing these factors will help you answer this next question and complete your P&L statement.
Expert tip: don’t forget about seemingly minor day-to-day costs such as travel and office supplies. They can add up quickly.
How much do I need to make to cover expenses and breakeven?
Part 2 of your P&L forecast involves setting your sales goals. In order to be successful, you need to make a profit. This means reaching a specific level of sales revenue to cover your expenses and exceed breakeven. Based on market research and your business strategy, you can create a realistic forecast of expected sales. If your breakeven goal is unattainable, re-evaluate your costs to find areas where you can save money or consider raising your price.
How much should I set aside for a contingency fund?
Unfortunately, things don’t always go the way we want them to, despite our best efforts. This is why you should always plan for the worst and create a contingency fund for your business. In order to determine how much working capital you need in your contingency fund, run your P&L forecast again, but for the “worst case” scenario. Your losses will give you an estimate of how much working capital is necessary to get your business through tough times and give you the opportunity to get your business up to speed.
Once you have these basic small business finance questions answered, you will have taken your first steps towards creating a successful business venture!