The first year of business is usually the toughest, especially when it comes to service businesses like ours. As we know, your newly-created business is usually competing with many others who are doing the same thing, and their businesses have been doing it longer. This is one of the many reasons we recommend that your new business have a business plan, and that one of the sections in that business plan covers the expected financials of your business.
The financial section should include a startup budget (money you are going to spend to get your business launched), yearly profit and loss statement for year 1, 2, and 3 (what you are going to make vs. what you are going to spend), and a bit of the explanation of the logic you used to come up with the numbers. When creating and managing your financials, below are a four simple pieces of advice.
1) Create three budgets: a very conservative one, a middle ground one, and the one you are shooting for, and then make sure you are comfortable if you only end up with the conservative one.
2) Make sure you have enough money to not only get your business started, but to get you through the first 6 to 12 months of business. A financial cushion covers you for a slow business start, allows for you to stick to your plan, and can help with unexpected costs.
3) Talk to others who are doing what you are doing, with relatively the same ideal clients, and see what their first year was like. They might not share actual financials with you, but having an ideal of number of clients, expenses, etc. can help you prepare a realistic budget.
4) Understand that your financials need to be watched and updated as you progress. Your budget should be compared to your actuals each month so that you have an idea of how you are doing and are able to make adjustments to future your projections as needed.
Similar to other sections in your business plan, the financials do not have to be formally written out – there’s no need to pull out the accounting books – but they should be well thought through and as accurate as possible. We are all in business to make money, and having a good understanding of how much, and when, can help you properly plan other pieces of your business and make your business – and therefore your life – less stressful.