Statistics show that a majority of new businesses fold within the first year, mainly due to lack of funding. However, the real reason may be a simple misunderstanding of the difference between income and profit.
There are many things to consider when opening a new venture, among them the company’s finances. Too often, the new business owner will delude themselves into thinking that because sales are coming in, they are making money. Too often they forget about where that money is going…and it usually isn’t onto the bottom line. At least not at first.
If money was borrowed to get the business off the ground, the investor, the bank and credit card companies, are going to want their monthly payments. Before opening the new business, the owner needs to take a hard look at the financial end to determine if the return will transfer into profit or simply disappear into the depths of expenses.
A good business plan will indicate whether or not generated income will be sufficient to pay the bills as well as provide the income on which to live. Just like the owner’s personal financial spreadsheet, the business plan needs to include its own financial plan to insure its survival.
This may seem daunting to new business owners, but it’s not really as difficult at it may appear. But, it can be a painstaking process to insure that all costs related to the business are examined. Outside the typical expenses of workspace, supplies and equipment, the cost of doing business also needs consideration. Insurance, taxes and licensing are often overlooked by the new owner.
One of the considerations of starting your own business is the investment needed to, not only get it off the ground, but having the means to support it until it becomes self-sufficient. Ant income generated must be earmarked for operating the business. It is the business’s income and not your personal gain. You get a piece of it, just like the utility company and suppliers, but if you envision it as your own, it won’t take long before failure rears its ugly head.
When planning a new business you will need to consider the amount of money you need not only to sustain the business, but also the money needed to sustain your private life as well. If you have a family depending on you, the stakes are even higher. Consider everyone who will be affected by your decision to leave the security of working for someone else for working for yourself. Can they survive on the income you will realistically generate from your business?
While owning your own business may be your dream, failing in your personal finances can quickly become a nightmare. In some instances, it may be advantageous to start your business on a part-time basis, holding on to your old job and its steady income, until the business begins generating a profit. Being able to do this will depend largely on the type of business being started and whether or not you are going to end up being your present boss’s competition.
