Some of this research may form your business and financial plan later on, but at this stage a broad scope understanding is introduced regarding the language of money. This information will help you fill out the forms and address your financial goals in the business plan writing stage of your journey. If you are currently running a business and are looking to expand, go to our Business Expansion section now.
Sources of Money:
- Investment (equity) financing from people who expect to share in the eventual benefits of your business; and,
- Debt financing (loans) from people and institutions who expect the money, plus interest, repaid according to an agreed-upon schedule.
Key Financial Tools:
Cash Flow Statement: Shows the flow of cash into and out of your business during a specific time frame. It includes when and where you will get your money and what you will spend it on. This is the most realistic picture of your business, as it indicates how much cash you will have available at any given time to keep your business running. This is the most important tool for new business planning.
Break-Even Analysis: This is the volume of sales you need to cover your costs. At the break-even point there is no loss or profit in your business. The break-even analysis is important throughout the life of a business, but particularly in the first three years of a new business.
Income Statement: This report lays out how much your business has earned (revenue), and the expenses that your business incurred during a specific time frame. It shows either a profit (sales exceed expenses) or a loss (expenses exceed sales). It is typically developed along with a balance sheet, for a business that has completed at least one year of operations.
Balance Sheet: A status report, or snapshot of the financial state of your business at a given point in time. It shows what your company owns (assets), what is owed (liabilities) and what is left over for you (equity). The balance sheet is created for an existing business with at least one year of operations, and would not be required from a new business.
How Much Money is Enough?
When you are figuring out how much money you will need, work out both your business and personal finances. Then calculate how much revenue you will need to start and operate your business for the first critical year.
Most businesses rely on a combination of personal savings, investments from friends and family, and loans to get up and running. Ask other business people about their experiences, and consult an accountant, bookkeeper or financial consultant at Community Futures South Fraser to learn more about the types and sources of financing that will work the best for your business and personal situation.
Overdraft Protection: Covers shortfalls in your business account up to an approved limit. Interest is charged only on the amount you borrow and the rates are competitive. Monthly administration fees usually apply.
Credit Cards: Personal and small business credit cards provide short-term loans for smaller purchases, and they can be approved with little or no security. The interest rates are usually higher than traditional loans, but there's no interest if you pay off the balance every month. But be careful: if you can't pay off the outstanding balance, interest costs will accumulate quickly.
Operating Line of Credit: A loan with a set limit — you can draw on when needed. Interest rates are lower than most credit cards and some loans, and you only pay interest on the outstanding balance. There are no fixed payments, except for a monthly fee and interest, meaning you have the option of paying down the loan as you can afford it. Lines of credit are usually secured by assets.
Term Loans are longer-term and are often used to cover expensive items such as capital equipment, real estate or renovations. They are repaid using established monthly payments, which you can budget for in your cash flow statements. The lender will ask you for security for the loan (equity in your home, cash, equipment, etc). Shop around for competitive interest rates for term loans. If you miss a payment, the lender has the right to demand immediate repayment.
Equity Investors, either public equity investors or private individuals, provide financing in exchange for a share of ownership, or equity, in your business, or simply a repayment of their investment. If your equity investors are family or close personal contacts, interest rates may be nominal or non-existent, and they may also be flexible in the repayment schedule. However, borrowing money from friends and family can sometimes put a strain on the relationship.
Venture capital comes from a pool of investors who are looking for a higher return. While they are usually interested in more established companies, they will consider start-ups if the potential is good. They generally seek a very high rate of return for their investment.
Angel investors look for higher risk investments with good growth potential, and tend toward investments in cutting-edge technology (though that is a generalization). Angel investors often negotiate very specific terms, generally with high returns.
Grants do not require repayment. The criteria are usually very specific, and the application procedure can be long, time-consuming and require specific reporting instruments for the length of project. Look for grants in targeted areas of key infrastructure, social and health programs, and partnership goals.