Once you've completed your business plan, it's a good idea to think about whether your idea is financially viable in the long term. A comprehensive financial plan can help you figure out if your business idea will pay the bills, make a profit and satisfy your financial goals. You can get started on creating yours by following the steps below.
Research and list all the items you need to start your business to get a good idea of upfront costs and whether you'll need to borrow funds. Here are some examples of costs that typically come up at the start:
The level of funds you need to cover your expenses until your business is generating enough cash to pay for them, such as:
Estimate your sales and expenses on a monthly, quarterly or yearly basis to gauge whether you can expect to make a profit or loss for each of these periods. This will help you develop sales targets, pricing and likely profit margins. You can base your numbers on the performance of similar businesses in your industry by using industry benchmarks, market research and industry analysis.
A business that makes a profit can still run out of cash. You may, for example, make a lot of sales the first month but only receive payment for these sales a month later. Completing cash flow projections can help you recognise whether you'll have enough cash to run your business or if you'll need additional funds.
Some useful tips to keep in mind include:
List all your expected assets and liabilities after your first 12 months to create a financial snapshot of your business. This is a good way to evaluate the financial health of your business idea - you can use your balance sheet numbers to work out if you'll have enough resources after a year to run your day-to-day operations.
Your balance sheet should include these three sections:
Completing a break-even analysis shows you the number of sales needed to cover costs - anything above this number can be counted as a profit. The break-even point can be useful for analysing the sales, costs and pricing numbers used in your earlier forecasts and judging whether your business idea is feasible. For example, if your break-even point is years away, you may want to revisit your numbers to see if there are any opportunities to make your business more profitable.
Things to consider are:
For extra guidance, an accountant can help you assess your prospective financial position and ensure you've thought through all potential income and expenses. You don't have to go it alone - there are plenty of places to turn for guidance. If you're looking for how to source advice or support for your start-up, visit business.govt.nz for information on business advisors, business groups, networks and mentors who may be able to help.
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This page is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and should not be relied on. This information has been prepared without considering your objectives, financial situation or needs. We recommend you seek independent professional advice and contact Inland Revenue before acting on this information.