That failure rate is not surprising. Starting your own business is very tough; and keeping it going beyond even the first year is even more tough. Taking that same business through the fifth year barrier is quite an achievement.

There are many reasons for business failure, but they mostly revolve around poor management skills, poor marketing skills, lack of planning, and .......MONEY. To be a successful business owner, you certainly need to understand finance, and the impact it has on your future business. A business plan, covering funding, cash flow forecasting, and details of your market and products or services, is a minimum starting point.

The Roots of Financial Failure in a New Small Business

The finances of a business cannot be isolated from its management and market. The business owner needs to know and understand how these three facets inter-relate. However, for the purpose of this article, we will concentrate on the financial aspects of a business, most particularly the initial capital with which you need to start the business, and provide enough working capital to keep the business going, and to guide it into a profitable business that will provide for you and your dependants.

The initial capital you need is not a figure you should clutch from the air. Your decision on the amount should be based on a business plan, which includes financial projections for the first 5 years. The first year is especially important and should be more detailed; as the first year passes, you will be able to monitor results against the plan, and see what adjustments you need to make to keep the new business heading towards profitability and financial strength.

Making the 5 year plan can be the source of your required capital, at least so far as the required amount is concerned. The first year of the plan should have a monthly breakdown. If you make out the cash flow forecast, a key part of the business plan, on the basis of zero capital investment, then the negative figures in the cash balance will give you an idea of how much finance you need to get started and maintain working capital.

As an example, let us assume your initial cash flow forecast shows your bank balance in negative territory for the first six months, and then becomes positive. The total of those 6 months negatives is the absolute minimum you need in terms of initial capital. If you set out the figures on a spreadsheet, then you can simply add the total of those six months negatives into the initial cash balance spot, which was previously set at zero. You will see that your cash balance never then goes below zero.

That, of course, is far too simplistic, and it is dangerous not to include some wide margins of error. Your cash flow plan will be wrong; that is a certainty. Once you have everything on a spreadsheet, you can then play around with your assumptions, such as sales, product costs, materials costs and so on. After doing many variations, in a process that some call sensitivity analysis, decide on an initial capital figure you feel comfortable and confident about

When putting your plan together, be aware that many people are over optimistic about their sales volume, and also the price the market will bear. Do a worst case scenario with your spreadsheet, and then you can use that as a basis for your initial capital requirement. Remember, as the first year progresses, you will be able to monitor everything in your plan, learn the reality of your marketplace in the raw, and refine your plan accordingly. If you are not able to put the plan together yourself, then it is advisable to get professional help.

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