External financing is not free, and it comes with a price tag. As a result, you mustn’t ask for more than you require. You will not be able to fulfill your objectives or ambitions if you ask for too little money.
To figure out the amount of money you’ll need to borrow, you’ll need to do a lot of planning, forecasting, and budgeting.
The following concepts will help you determine the number of funds you require:
1. Business Plan
2. Forecasting
3. Budgeting
Business Plan
Understanding how much money you’ll need begins with your business plan, which serves as a road map for your company. Your strategy outlines your objectives and ambitions, as well as how you intend to attain them. The plan should be evaluated regularly, and your goals and targets should be changed as you reach your milestones. You can develop your financial plan or hire a professional financial planner to assist you. The first step is to figure out how much money you have and what your spending habits are. After you’ve documented this, you’ll need to think about longer-term goals and means to achieve them.
You can also learn how to write a business plan here
Forecast
A forecast is an estimate of how much demand for your products and services will grow in the future.
Lenders want to know how their money will be used to help you grow your company. When applying for a loan or any other type of funding, you must be able to demonstrate this.
To forecast, consider your historical sales (for example, how much you sold in prior days, weeks, or months), as well as upcoming business trends and any other marketing initiatives you may have planned. You may make an educated bet about your future sales by integrating all of these factors. This estimate will then be used to create cash-flow projections and a budget for your company.
Budgeting
A budget outlines what you’ll spend your money on (based on your plans) and how you’ll pay for it. It’s a planned outcome of your long-term goals that enable you to:
- Keep your finances under control.
- Have enough money to cover your current business commitments.
- To make sound financial decisions and meet your objectives.
- Lastly, to save and source sufficient money, to fund your future projects.
It is critical to have a budget since it allows you to identify any potential problems ahead of time.
To calculate how much money you have or need to source in your firm to address any financial shortfalls, you must know how much you will earn and how much you will spend during a certain period.
Financial statements
Financial Statements are a formal record of an entity’s financial actions. Written reports that quantify a company’s financial strength, performance, and liquidity. The financial effects of business transactions and events on the entity are reflected in financial statements.
Four Types of Financial Statements
- Statement of Financial Position: Statement of Financial Position, also known as the Balance Sheet, presents the financial position of an entity at a given date. It is comprised of the following three elements:
- Assets: Something a business owns or controls (e.g. cash, inventory, plant, machinery, etc).
- Liabilities: Something a business owes to someone (e.g. creditors, bank loans, etc).
- Equity: What the business owes to its owners. This represents the amount of capital that remains in the business after its assets are used to pay off its outstanding liabilities. Equity, therefore, represents the difference between assets and liabilities.
2. Income Statement: The income statement is another important financial statement for your small business. It provides users with a picture of the business’s financial performance over a specific period. Also known as a statement of revenue and expense, or a profit and loss statement (P&L), the income statement is a statement of earnings that shows a business’s operating and nonoperating revenue and expenses.
Like the balance sheet, the information contained in an income statement is used in financial statement analysis to calculate financial ratios that provide users with further insight into a business’s financial performance.