Starting a business involves making key decisions about strategy, marketing your business and financing your business. Essentially what every business owners tries to do is invest in a product or service and earn a return on that investment. There are many ways to spend a dollar, the trick is to develop and implement a plan that best achieve your business goals based on your financial resources.
You have a number of options when it comes to raising the seed capital needed to start your business. The most popular option is to obtain a traditional loan; however, bear in mind that what is popular is not always what is best. Between 1977 and 2000, less than 50 per cent of the new businesses started were alive at age 5, according to U.S. Census data. This, coupled with the high cost and difficulty in obtaining financing, makes other sources of financing a better option. Certain non-profit agencies, state and local governments offer grants to start-up a business. These funds do not have to be repaid and often provide a major boost to getting your idea off the ground. Equity financing can be obtained from a venture fund; however, keep in mind that you surrender ownership and in some cases management authority to have your business funded in this manner.
Businesses face seasonality, slow periods, economic downturns or rapid growth that make maintaining a reserve fund a necessary component of running a business. In addition to the funds needed to get the business off the ground and run day to day operations, maintain a three- to six-month easily accessible reserve fund to hedge against any unforeseen circumstances. Should you need to tap into your reserve fund, be sure to replenish it once business activity has stabilised.
Have a plan in place for how much money you will earn and how you will spend that money. Run a best-case, base-case and worst-case scenario so that you can be prepared for various market conditions. It is difficult to anticipate major shortfalls in the business, so do your homework on how the market is performing. Understand the gross margins, inventory costs and other general and administrative expenses.
Know at what point you will begin to incur a profit. The break-even point is the point at which you are able to cover all of your expenses and begin to make a profit. Calculate the break-even point by dividing your fixed costs by your gross profit percentage to determine the amount of sales revenue you'll need to bring in just to break even. You can find online calculators that allow you to calculate the break-even point using your fixed costs, variable costs and unit price. Every product or service has fixed and variable costs, therefore you can use this analysis for inventory-oriented and service-oriented businesses.
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