Before starting a business, it's crucial to assess how you will cover the costs involved. Determine if you have the necessary funds or if you need to borrow money. If you plan to leave your current job, ensure you have enough savings to support yourself until your business becomes profitable.
Many startups fail because they run out of money before making a profit. Calculating your expenses is one of the most important things needed to start a business. It's wise to overestimate your startup capital, as it takes time for a business to generate sustainable revenue.
A break-even analysis helps you understand when your business, product, or service will become profitable. The formula for the same is- Fixed Costs ÷ (Average Price Per Unit – Variable Costs) = Break-Even Point. This analysis is a valuable tool as it shows the minimum performance required to avoid losses and helps you set production goals based on profit generation.
There are three main reasons to conduct a break-even analysis:
Calculate the revenue needed to cover all expenses. Identify which products or services are profitable and which ones result in losses.
Consider fixed rates, variable costs, total costs, and the cost of physical goods or labor.
Find ways to reduce fixed costs, lower variable costs per unit, and improve sales.
Avoid overspending when starting a business. Be mindful of the purchases that align with your business goals, and avoid extravagant equipment that doesn't contribute to your objectives. Keep a close eye on your business expenses to ensure you stay within your budget.
There are various ways to acquire startup capital, depending on factors like creditworthiness, funding amount, and available options:
Seek commercial loans from banks or consider small business loans from the Small Business Administration (SBA) or alternative lenders.
Research and apply for competitive grants specific to your business situation, such as minority-owned, women-owned, and government grants.
Consider attracting angel investors who can provide significant funding in exchange for an active role in your business.
Launch an equity crowdfunding campaign to raise smaller amounts of money from multiple backers using specialised crowdfunding platforms.
When selecting a bank for your business, consider smaller community banks that understand local market conditions and are more likely to work closely with you based on your business profile and character.
These banks prioritise building personal relationships and can offer faster decision-making compared to larger banks that rely on credit scores. When choosing a bank, evaluate what matters most to you and your business needs and schedule meetings with different banks to find the best fit.
Assessing your finances, performing a break-even analysis, monitoring expenses, exploring funding options, and choosing the right business bank are essential steps in ensuring financial stability for your new venture.