It is very important that you have sufficient interest in finances and enough knowledge of finances before you even start your own business. In fact, this is one important factor of why small businesses fail so much – they don’t adequately know how to control costs or make proper collections and not let debts grow beyond an unreasonable limit.
For countless entrepreneurs, the major stumbling blocks in starting a business are forecasting sales, compiling financial statements and projecting regular cash-flows. Of course, there are accountants who will help you with the nitty-gritty of things but you have to at some point be able to have a global picture of what your finances are like and where you are headed. In fact, it is thought that the reason out of thousands of firms launched every year, only a few survive. Those that do not are ones wherein the owners did not have a good understanding of what their expected revenues, would be or how they related to the expenses and profit.
Only a lucky few can start their business in this world with unlimited finances. Therefore making financial forecasts allows prospective entrepreneurs, to estimate how much time will be needed for the business to settle down, reach a break-even point and then actually start making profits. Most investors and experts believe that it is best to prepare financial forecasts of at least two to three years which will include profit and loss statement for all years and monthly cash-flows for at least one year. These forecasts will help you get a reality check in terms of where you stand with the money and what you will need to do to fund the business till it starts making profits. You may need to consider various options of finding the money including using your own resources, asking a partner to pitch in with some investment or speaking to family or friends who can lend you some money. For large sums it is best to approach a bank or credit union. You could also try other investors and specialty loan programs.
Financial forecasts also serve another important function. Working on these details will help you realize the true costs of starting and running a business. You will be able to judge for yourself on whether you will be able to build a self-sustaining business with the kind of financial projections that you anticipate or should you just cancel the project instead of wasting more time and efforts in it. Do not delude yourself into thinking that your business will start flourishing in its very first year. Even if you projections are showing that, redo them and then make sure you are honest and realistic about sales projections and cost estimates. If your projections show that you are losing a lot of money in your first year, then you need to look where you can reduce your spending and how you can reduce your fixed costs.