You’re going into business. Now you have to figure out how you’re going to pay for it. Why? Well, because you have foregone the security of your job and employment to take a risk and try and improve your financial position. Now, let’s be realistic. You’re probably not going to be making millions straight upfront, but you need to make sure you’re covering your expenses and that you’re effectively paying yourself a wage. Otherwise, you may as well stay working for somebody else.

Forecasting your cash flows

So finding finance and how to finance your business is a tough thing, and probably one of the toughest challenges facing all new businesses. The first task is actually understanding how much money you need. Sometimes it’s obvious. Say you’re starting a café and you need to buy equipment, then you might need to buy coffee machines and furniture, other tools, etc., and similarly for different types of businesses. So finding equipment is straightforward. But you also need to forecast your cash flows, and a cash flow forecast is a very important thing to prepare. We actually talk a bit about that in our business planning videos, which you can access by clicking on the link.

Preparing cash flow budget

When it comes to preparing cash flow budget, think about “how much money am I going to need?” And it’s different for different businesses. In some businesses where you get paid upfront such as a café where customers are coming in and paying, it’s quite easy as far as you’re always getting that money or cash flow coming in. In other businesses where you’re putting things on account, you might not get paid until a month or two later, so you need to be able to finance those jobs in the meantime. So cash flow budget is absolutely critical.

Once you’ve got your cash flow budget, you’ve got to figure out how you’re actually going to pay for it. Now there are a few ways of doing this. One, if you’ve got a partner maybe they can decide to stay back and work for a bit longer rather than joining you in the business straightaway, or maybe you can decide to take on a part-time job so you can do the two jobs and thus help pay for your business. But, sometimes those may not be feasible options and you will actually need to find finance.

The costs involved

I like to break the costs down into two main sections. One being capital expenditure which includes the equipment, vehicles, and those sorts of costs upfront. Now, you can often get a mortgage and that’s how you’re going to finance that specific piece of equipment. So when you go to a bank for the mortgage, the bank is going to want to see that cash flow forecast in order to prove that you can make those payments.

The other is the ongoing operational costs, and that’s where you need more of an overdraft situation, once again, from a bank and sometimes from alternative forms of finance. And it does come with a catch. Those alternative forms of finance — and you’re seeing a lot of them advertised at the moment — they charge higher interest and often they only want to deal with you after you’ve been in business for more than one year. The other way of finding finance is from family and friends. Now, if there’s a generous friend or family member that’s willing to loan you some money, then there are options where you can actually register a security as part of it, so they can actually be like a bank giving you the money.

So there are a few different options, but it is tough at the same time. Come and talk to us because you need to explore your different options. The one key thing is that you need to know how much you’re going to need. So many businesses fail because they haven’t adequately planned for their cash flow, and they’ve overestimated their income flows for a startup period. And if you’re dealing with a bank, one key tip — be honest and be realistic. They know if you’re inflating figures, so do that cash flow budget and make sure it’s a realistic cash flow budget, and be honest and truthful about what you expect to do, and you’ll probably be in good step with the banks.

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