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.
3. Cash Flow Statement: The Cash Flow Statement presents the movement in cash and bank balances over a period. The movement in cash flows is classified into the following segments:
- Operating Activities: Represents the cash flow from the primary activities of a business.
- Investing Activities: Represents cash flow from the purchase and sale of assets other than inventories (e.g. purchase of a factory plant).
- Financing Activities: Represents cash flow generated or spent on raising and repaying share capital and debt together with the payments of interest and dividends.
4. Statement of Owner’s Equity: The fourth financial statement that a business needs is a statement of owner’s equity, also known as a statement of changes in equity, or a statement of shareholders’ equity.
Retained earnings are often used to either reinvest in the company or to pay off the business’s debt obligations. It provides users with information regarding the financial health of a business, as it shows whether the business is capable of meeting ongoing financial and operating obligations without requiring its owners to contribute more capital.
Tips for Tracking Business Expenses
- Keep business and personal expenses separate: Keeping your business and personal expenses separate from the start is one of the best ways to better track your business expenses. There will be no doubt as to whether an expense was made for business or personal reasons in this manner. Make sure you have a business credit card, a business checking account, and company savings account set up.
- Make sure you know what counts as a business expense: It also assists in ensuring that you understand what constitutes a legitimate company expense and what does not. This will assist you in determining which account you will use to make the payment. It’s crucial to keep track of business expenses because they may be tax-deductible. If you’re unsure whether anything should be deemed a legitimate business expense, consult with your accountant or a tax attorney.
- Record any transaction ASAP, and always save receipts: Whenever you make a business transaction, whether it’s an internet purchase, a check to pay a bill, a credit card purchase at an office supply store, or cash at a restaurant for a business lunch, make sure to document it as soon as possible to avoid losing or forgetting it. Save every receipt you receive in a specific location so you may refer to them at any time if you have a query. In the case of an audit, they will also be required.
- Use mobile apps: There are numerous apps available for download on your smartphone to assist you in keeping track of your finances and expenditures. Examine many possibilities to see which ones best meet your requirements.
- Use accounting software: Using accounting software to ensure your finances are in order, rather than relying on memory and best guesses, is a good idea. When you’re initially starting, a simple spreadsheet may suffice, but as your business grows, you’ll need to invest in a more powerful application that can do more than just track pluses and minuses. Check out internet reviews to pick the finest program for you.
Five Steps to Get Your Business Finances in Order
- Keep your personal and business finances separate: Confusion will surely emerge from combining your personal and corporate finances. While charging everything to a single card may appear handy at first, it will make tracking your spending considerably more difficult than it needs to be. Begin by obtaining a separate bank account and credit card for your company. This technique will remove the effort out of sorting your transactions every quarter, or every year, as the case may be, for continuing financial tracking and measurement, as well as for tax considerations.
- Know your tax responsibilities: Your tax duties will vary depending on the state you plan to conduct business in and the type of business you’re starting and may include federal, state, and local payroll taxes; corporate taxes; sales or use taxes; or others. If you have employees, you may be required to carry workers’ compensation or other types of insurance. Being uninformed of your responsibilities can be costly, especially if penalties, interest, and fees are imposed. You can get advice from the IRS, your state’s revenue agency, and local tax authorities, but it’s also a good idea to seek advice from an accountant.
- Stay organized and plan: Keeping track of your finances and forecasting future revenue and expenses will help you make smarter long-term business decisions. Planning can be difficult without this information. You could be caught off guard if you aren’t planning for the future of your company. You should plan as far ahead as ten years in advance if you want to get ahead and stay ahead of the competition. If you keep ahead of the game, you’ll be able to avoid unpleasant shocks. Even if unforeseen expenses come, if you’ve been spending conservatively, you shouldn’t have any serious issues.
- Budget and track expenses: Playing fast and loose with the checkbook can get you in trouble in a few ways. First, it can mess with your cash flow, which is the reason many businesses fail. Also, when you lose track of what you’re spending, you could be missing out on valuable deductions for your business. “Every time you’re deducting $1,000, you’re saving a significant amount of money on your tax bill,”
- Consider hiring a professional bookkeeper: Most people aren’t mathematicians or bookkeepers, and they’ll never be as enthusiastic about them as accountants or bookkeepers are. If keeping track of your accounts is starting to grate on your nerves, it’s time to hire a professional bookkeeper. Many business owners tend to try to do everything on their own. The finer components of small-company accounting, like legal problems, aren’t frequently within a business owner’s wheelhouse. Although it’s easy to be put off by the cost of hiring a bookkeeper, they will be able to save you money in the long run. You’ll have more time to focus on high-value tasks that keep the company moving forward, while your bookkeeper takes care of the tedious numbers.
