By Shanita Dognia
8 out of 10 businesses tend to fail within the first 18 months according to Forbes.
29% of entrepreneurs under-estimate how much funding they need according to CBInsights. Believe it or not but running out of cash is the 2nd most common reason, behind having no market need of why startups fail. The reasons behind this are a lack of experience and a lack of knowledge of how to estimate finances. A start-up company has to have enough funds to carry the owner out of the red. Generally speaking, 2-3 years is how long a business typically takes to reach profitability, although this will vary across industry so it’s best to benchmark against your specific industry. (SmallBusinessChron) In addition to startup fixed costs, a business needs enough working capital to cover monthly expenses plus contingencies. But, how much should your contingency fund be? See if you can guess correctly.
Having a solid business plan with a most-likely scenario pro forma income statement (download free template here) is the best way to predict how much funding you need before reaching profitability. (Quickbooks)
A pro forma income statement will include
- Sales projections: Based on your industry-specific research and knowledge
- Cost of goods sold or COGS: How much do your products or services you sell cost you.
- Other expenses: Indirect expenses such as rent, utilities, internet and communications, accounting, attorneys, website hosting and maintenance, marketing and advertising, insurance premiums, salaries, and debt repayments.
- Gross profit estimate: Sales projections minus COGS and expenses (and don’t forget contingencies!)
The SBA, or Small Business Association, provides business plan guidelines as well as mentoring throughout the United States. The SBA is a government agency designed to help business owners overcome hurdles that may arise.
By being aware of the top reasons for business failure and the window where you are at the highest risk you can take proactive steps such as creating a pro forma income statement including the most-likely scenario and worst case scenario in order to best set you and your business up for success.