start up business finance

start up business finance

The Essential Guide to Start-Up Business Finance

1. Introduction to Start-Up Business Finance

Overview on Business Finance Understanding the working of business finance is an essential part of starting up and operating a successful business. Below are 6 essential rules that you need to know. If you are planning to start a business, then you might be thinking of capital. It is the first factor that you need to think out. It is a fact that the amount of capital you will need depends upon the size and type of business you are about to start. If you are planning for a manufacturing business, then you will need lots of capital on other expenses that are not required in a service type business. But these days, with the advent and pace of the internet, you can even start a business without much capital.

Realizing the potential and starting a business is not enough anymore; you need a considerable amount of cash and actual know-how about the legal matters for making your start-up business survive. The main concern after realizing a business potential is the capital. There are various resources that can be invested in your start-up business. It usually depends on the type of business you are about to start. The start-up model will also determine how much capital you will exactly need and by what methods you can get it.

2. Understanding Financial Statements and Ratios

This part explains the four types of financial statements you will want to monitor, why and how to monitor them, and how they relate to one another. Also discussed are a number of ratios that are significant for a new business, or for a developing business in financial difficulty. These ratios operate as financial indicators that signal the need for action in certain areas of your business in order to generate growth and profit. With this knowledge, you will detect the clues early and take the necessary steps. These clues will also serve as an early warning danger signal to financial institutions and potential investors, which in itself is important.

Just the idea of financial statements can strike fear into many a new business person. Words like “balance sheet,” “profit and loss,” and “cash flow” can even scare someone off! Even if you are not a new business owner, but do not fully understand your financial statements, you are not alone. Many people fail in business because they just don’t really get the point of the numbers. The figures in your financial statements are not just numbers, they represent the health of your business. If all of the numbers in these statements aren’t healthy, your business won’t be healthy. Financial statements are your report card, and can help you look at your business critically. They are a mirror that shows you where your business is today – and what changes you need to make in order to be successful. While your financials tell you where you have been and where you are, they cannot predict where you are going. To make your business profitable, these numbers must be constantly updated and reviewed.

3. Sources of Funding for Start-Up Businesses

Small business debt finance does not stand in isolation. The requirements of the equity investor, the depository institution, and the nonprofit organization differ; yet they are alike in seeking profit and their aim to maximize expected returns within the framework set by the limitations of risk and administrative cost. The differences in their objectives as providers of debt finance are by and large differences of degree rather than of kind, though there are some attributes that are pertinent only to one or the others, or may be emphasized or qualified in different ways. Without doubt, business debt finance requirements are diverse. Because of this diversity, when judgement can easily be clouded, it seems appropriate to deal with various possibilities of raising funds for the small business in a segmented ITVTEC fashion.

Funding is an ever-present difficulty for small and start-up businesses. The average small business requires at least £400,000 a year at start-up. A further study points out the real difference in perceptions of the problem of financing a small business in relation to the current financial condition of the firm. Only 30 percent of the prosperous firms stated that difficulties in obtaining finance are indeed a major problem. For those small firms finding themselves in more adverse conditions, the percentage increased dramatically with over 75 percent stating that finance was in fact a major problem. When in need of funds, the small business has the enviable task of choosing from a plethora of possibilities – enviable, that is, when the idea to raise debt finance for a venture already exists.

4. Financial Planning and Budgeting for Start-Ups

This means that starting a business isn’t about writing a big book at all; it is the exact opposite – it is about knowing what you want, reducing it to chapters, and then to paragraphs, and then to sentences and budgets. The first thing you must do is to decide to start a business. Then confirm your dream, or decide which one is real. Then decide what you love to do. Then turn this into your purpose. Then plan your business around your purpose. Then make money doing what you love, and reach business success. Keep your start-up plan in your head as you prepare your budgets. Keep your purpose in your head as you watch your numbers, and use this information to react quickly to events as they unfold. Spend money on your reason for being and you can watch your market grow.

Budgeting for a start-up business is clearly different from budgeting for an established business, as start-up businesses are often based on a dream in which money is in incredibly short supply. In other words, spendthrift ways have absolutely nothing to do with start-ups. You must have a budget clearly identifying all costs, both capital and operational, and the time during which money will arrive and leave working capital. But you can’t manage what you can’t measure, and to start a business, you don’t need an accounting system – you need a financial model, and you must set it up before you do anything else. The great thing about a start-up business is that if you are doing what you are passionate about, you have been doing it elsewhere, which means you know what you want and have made a lot of important business decisions already.

5. Managing Cash Flow and Financial Risks

In today’s global economic market, risk is an inherent part of doing business worldwide. In any business, risks cannot be eliminated but only managed. Strategic and focused management of risks can offer a unique opportunity to create and protect enterprise value and improve long-term performance. To achieve this, a business must connect strategic objectives with an enterprise-wide financial risk capacity. Small businesses need to control the critical financial risks associated with balancing commercial growth and continued personal financial security concerns. Their financial approach must be cost-focused, ensuring that resources are committed to the areas of high return and low risk. Interest and currency management must be at the forefront of their business activities. Effective financial planning and control systems will help safeguard your business and your personal financial situation, introducing more flexibility and planning into how individuals manage their finances.

Access to cash and cash flow management are probably the most critical issues a start-up faces when launching. The conventional cash flow cycle usually involves ‘cash outflows’ and ‘cash inflows’. The primary reason for business failure in the traditional sense is an inability to manage cash outflow and inflow effectively, leading an enterprise into a debt spiral. This can often be managed effectively by entering into factual agreements with the supply chains and using favorable commercial terms, which usually enhance the ability to support cash inflow at key stages. Creating good visibility of financial performance to secure lines of credit from a bank, which can prop cash flow, especially used as a vehicle for competitive advantage. However, most smaller start-ups struggle to meet these banks’ requirements for collateral. When your cash flow is healthy, you will be in a position to invest in continued business growth.