If you are a small business startup, how do you know if you are going to make it financially?
How do you figure out how much money you need to make in order to survive past the first couple of start-up years?
This is one of the hardest things to determine for small business startups.
The thing that makes this so hard for startups is because startups are operating from projections. And the greatest unknown is your income!
You can typically come up with a fairly accurate account of your estimated expenses, including product cost, overhead expenses (office, rent, utilities, vehicle), professional services (accountant, attorney, business coach), etc. However, your income amount is tricky.
Many startups ignore projections. They would rather focus on getting their great product or service out there instead of running the numbers and seeing what their projected profit margin will be. Unless you have a sizable bankroll, this is a mistake.
Why? Because if you know your projected cash profit or loss for the year, then you can make informed financial decisions about how to spend the money you currently have. Knowing now what you are willing to liquidate, where you can tighten your belt, how much debt you are willing to incur, and where your breaking point is, means you will make intelligent (rather than emotional) decisions throughout your startup and for years to come.
Basic formula for anticipated cash profit:
1. Take your projected income for the year.
2. Subtract all anticipated expenses for the business year.
3. This equals your anticipated cash profit
4. Overarching question: Can you survive on that profit and for how long?
So, before you rush to get your product out there, do your homework. Be sure to take the time to do projections for your business so you can determine whether or not you’ll have enough cash to sustain you and your business for your first couple of startup years.
Agree? Disagree? Let me know.
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