Starting a business can feel like you’re flying by the seat of your pants, especially in the early days as you try to catch everything that’s coming at you. This is also the time to engage in fiscal discipline to prevent the business from burning through cash reserves. Taking the time to create a financial plan helps you avoid common startup mistakes and guides your business to a successful future.
A financial plan helps you spend responsibly, make better decisions with available funds, and time major purchases. It also helps you create a solid financial foundation on which to rest your business plan, enabling you to experience steady and reliable growth for your business.
Know Your Minimum Operating Costs
A business has set costs that are in place the moment you open your door for business that day. It also has costs even when you’re not there. That means your business has to generate enough revenue to cover the cost of operations in order to break even every day. If your business is closed for a day or two every week, you need to add the costs of being close to your base costs.
Some of the costs include:
- Rent or mortgage
- Utilities
- Equipment
- Payroll
- Supplies
- Insurance
- Merchandise
- Property taxes
And more.
Take all of these inputs, add them together, then divide them by 7 for a full week, or however many days you’re open for. For days the business is closed, use inputs such as taxes, insurance, utilities, and any other costs that relate to the maintenance of the building you’re working from. The final number gives you an idea of how much money you need to open your doors every day.
As your business grows, so will these costs. Tracking them helps you set minimum sales goals, and gets you into a long-term habit of helping your business succeed. You can also separate these costs into separate business bank accounts, which prevents the mingling of funds and gives the security of having the money ready to pay a bill.
Estimating Payroll Costs
Labor is one of the bigger costs you need to anticipate, even if you’re the only employee. The overall cost of labor is based on how many employees you have your salary, and the number of hours you need from yourself and your employees every week. Estimating these costs helps you get a handle on how much money you need to set aside for the payroll and taxes.
Paying yourself a salary or wage is a standard practice, and it’s easy to figure out how much to set aside. As your business grows and more help is needed, you need to put more focus on the amount of the gross payroll. Budgeting for labor costs helps you compensate for the additional expense and makes it easier for you to accommodate more employees when the time comes.
In the event you’re subcontracting your labor, you can easily determine how much you need to pay the agreed-upon amount. However, if you’re employing people, you can still use a whole number for W-2 employees since the FICA deduction happens after their gross pay has been calculated.
Forecasting Future Income
The concept of forecasting future income for the business sounds a bit like predicting the weather, but it’s an excellent way to predict how much income you’ll make over a stated period. For example, you run a seasonal business in a town that sees a similar number of visitors each year. Your business sells products that appeal to a certain age group, and you can use visitor demographics to determine the number of people who are likely to come into your store. Not everyone is going to turn into a sale, but you can take the number of sales from that demographic and use it to predict next year’s sales numbers.
This information helps you determine the likely sales numbers for the following season and also helps you adjust your prices and sales tactics accordingly. You might want to attract a younger or older demographic, position a new product next to a popular seller, or create a promotion for your most popular product.
There are multiple models you can use to forecast future revenue based on your chosen inputs. The numbers that the model generates are reliable as long as there are no major disruptors such as COVID-19. In fact, the airline industry used forecasting models that showed it would take until 2025 for a full recovery after the spread of COVID-19 in 2020. That prediction has been mostly accurate, as the airlines are reaching their forecasted targets as anticipated.
Creating a Plan for Taxes
Taxes are something that your business is responsible for as long as it’s in operation. Planning out your taxes, whether it’s for payroll or profits, allows you to prepare for their payment and reduces your tax liability. You’ll be able to rely on certain deductions, such as depreciation for equipment and costs for running an office, which helps you estimate how much you should set aside for the taxes due.
Keeping on top of your business taxes as part of your accounting routines helps you determine how much money to set aside every month, then use it to pay quarterly estimated taxes. The same can also be done with payroll taxes by totaling the wages for hours worked, then deducting the FICA percentage from the total. These routines help you keep cash on hand to pay the taxes when they’re due, and prevent you from coming up short.
Tax planning helps you set aside money in a way that doesn’t affect the rest of your business income. Keeping sufficient money aside for taxes means you don’t have to dip into funds that are earmarked for other uses, an act that affects your ability to keep your business profitable.
Conclusion
Financial planning for your business makes it easier for you to keep it going for the long term and avoid early burnout. As the owner, you know that you’re going to have recurring costs, taxes, payroll, and more that need to be settled every week, month, and year. Making a point to engage in financial planning helps you prepare for these costs so they don’t become overwhelming. It also helps your business survive and thrive for years to come, so you can grow and expand it into the operation of your dreams.
Author Bio
Megan Isola holds a Bachelor of Science in Hospitality and a minor in Business Marketing from Cal State University Chico. She enjoys going to concerts, trying new restaurants, and hanging out with friends.
