Entrepreneurs are creative people. It doesn’t take much inspiration for them to hatch an idea. But the process of transforming an idea into a concept and then reality requires capital. Oftentimes, the lack of a budget in a startup can stymie the development of an idea even before it can get off the ground.
A budget is an allocation of available capital to fund a specific purpose. In a startup, a budget is needed as early as the pre- operating stages. But your budget should also cover capital investments, contingencies and working capital for at least 6 months.
Most startups are small business concepts that have limited capital or access to funds. A startup’s money management approach will determine how far it will go while the business is trying to bring in much- needed revenues.
There are essentially 3 immediate sources of funding for a startup:
- Savings – Some entrepreneurs are willing to invest part of their savings into the startup. A good strategy would be to stay on your full- time job until such time that the startup can sustain operations and afford you a decent salary.
- Family and Friends – They may not agree with your idea off the bat but asking your family and friends to lend you money will be an easier undertaking because they are there to support you.
- Financial Institutions – Banks often have financial packages to support startup ideas. The requirements may be stringent; you may have to show proof of capacity by presenting financial studies or collateral. There are also government programs that could provide seed funding for your startup.
Before you decide on which source of funding to tap into, the first thing you should do is to conduct thorough research on your business idea. Come up with a project feasibility study which should include the following:
- Market Study – Determines if there is demand for your product or service.
- Marketing Study – If there is a market, the marketing study prepares the road map on how to reach them.
- Financial Study – Outlines the different stages of funding including key areas of responsibility. Your financial study must present the following: Summary of Capital Investments, Breakdown of Working Capital, Projected Income Statement with different scenarios, Cash Flow Statement, Projected ROI; Pay Back Period.
If you do not have the time to prepare these studies, do not hesitate to hire someone who can. You can easily find virtual assistants and freelancers online who have the experience and know-how to conduct these studies at very affordable prices.
Collectively, these 3 studies become the basis for your Business Plan. If you are planning to get funding support through a bank, financial intermediaries or investors they would want to know what you plan to do with their money and if they could earn from it.
In fact, banks and certain types of investors will require you to submit a Business Plan complete with financial projections. They need it to validate their investment by running an independent study to verify your figures and claims.
The Business Plan will also provide the guidelines for managing your startup. The financial projections will show if you should risk your savings or if you need to borrow additional funds from family and friends. That is the importance of running the financial projections under different scenarios, especially the worst case scenario.
One thing you need to remember is that securing financial assistance is not just about capitalizing your business needs. You should also consider the intangibles and future scenarios.
- Do I have enough experience to resolve current obstacles and future challenges?
- Is my level of proficiency enough to manage the core functions of my business?
- What happens if revenue targets are not met in the first 6 months and the well has gone dry?
If this is your first venture, you may not have the management experience needed to successfully get your startup off the ground. A business has many key areas of responsibility which require their own competencies and skills.
Family and friends will give unconditional support but being emotionally invested in you may dilute their objectivity when it comes to making sound business decisions. Besides, running a business can be a stressful experience. You would not want it to erode your personal relationships.
You may have to seriously look into the possibility of getting investors to fund your startup.
There are different kinds of investors. The type you need will depend on your expectations and what you are looking for. For some entrepreneurs, they only want “silent partners” or those who provide capital but are not directly involved in the day- to-day operations of the business.
There are also entrepreneurs who seek involvement from partners specifically from the management standpoint.
If you are thinking of investors, here are 4 different types you may want to consider for your startup:
- Angel Investor – There are entrepreneurs who have amassed enough wealth that they feel it is time to give back and support aspiring entrepreneurs. They usually invest in startups which they believe have potential but are struggling to find financing. An angel investor may offer to buy shares of stock from your company or simply extend a loan. Many openly provide mentorship in addition to funding. There are also the “ROI Angels” who will invest only when business conditions are more stable.
- Peer- to- Peer Lending – Also referred to as P2P Lending, this allows startups to list their business on their websites in order to entice potential investors to provide funding assistance. Prosper and Lending Club are among the popular websites for P2P Lending. If you plan to go by this route, here are a few reminders to keep in mind: (1) Present the results of your Business Plan; investors want to know if your analysis, figures and expectations are realistic and near accurate, (2) Share your story; tell them why you decided to pursue this particular business, (3) Sell your expertise; a big part of landing support is your ability to sell yourself. Investors want to know if they can bank on your expertise to manage your business well.
- Venture Capitalists – These are investors who tend to offer financial support to businesses that already have a track record. For example, if your startup has gained appreciable traction and is planning to expand. Venture Capitalists play hard ball. They are willing to invest millions of dollars but you have to be prepared to surrender a significant amount of your equity and management control of your company. Some Venture Capitalists may set conditions which may make you feel more like an employee of your own company. They may also expect returns on their investments that is much higher than what you get from a business loan.
- Crowdfunding – Websites such as Kickstarter, Indiegogo and RocketHub allow entrepreneurs to secure funding for their businesses from a multitude of small investors. It is not an easy task because you are competing with other startups. Similar to P2P Lending, you have to entice investors to place their money on your startup over others. The good thing is new crowdfunding platforms are being set up every day. If it doesn’t work out with Kickstarter, you can try RocketHub or PeerBackers.
Whether you decide to fund your business through your own means or find investors, neither approach will work if you do not have smart money management policies and procedures in place.
Ultimately, how you manage your budget will determine whether your startup will grow to become a successful venture or end up as another statistic on small business failures.
About Felix Webb
Felix is a marketer that helps entrepreneurs outsource services and tasks at SmartVirtualAssistant.com.au
