Find out how much money you'll need to get started and to keep the business running.
Not everyone can afford to start a business immediately. But if you know your idea is viable, then you can start to build your business case straight away. Just keep in mind that starting a business generally costs more and takes longer than you think.
How to use this tool
As you navigate your way through the pages, you will be prompted to answer key questions and select items.
Simply fill in each box and download your plan when you get to the end.
Before you start your business, you need to know if your idea is financially viable in the long-term. It’s possible that your savings, existing job, and current lifestyle will be at risk. So it’s crucial to understand the financial viability of your business.
Right from day one you should be aiming to make a profit and operate with a positive cash flow. In business the golden rule is:"make sure more money is coming in than is going out."
A quick calculation of potential profit is useful before you go into more detail. Start by using the Potential revenue template provided or consult your research completed to-date and decide on a realistic annual revenue figure.
Remember to be honest about the likely profitability of your business – now is the best time to identify any weaknesses in your plan and go back to the drawing board if need be.
Download this Excel Potential revenue template so you can complete this calculation.
We are a small motel consisting of five rooms overlooking native bush and a secluded bay.
Based on industry norms for similar businesses, we should be able to stay open for 360 days per year (1800 room nights) and charge an average of $145 per room night.
Local tourism statistics and market research completed to-date has helped us estimate that accounting for the slower off-season, our occupancy rate is likely to be around 50 percent, which means our actual number of occupied room nights will total 900. The cost of cleaning and servicing will average approximately $5.00 per room per night.
Based on the above figures, our motel should be able to draw over $126,000 in revenue each year.
Determining capital costs
Capital costs are the costs of assets you need to buy to run the business. They include things like land, buildings, plant, machinery, general equipment, office equipment, and furniture. If you can’t cover your set-up costs, then you’ll have to borrow money or delay your start.
Your capital costs are one-time expenses that you’ll incur when you start up and have no bearing on the business turnover. Add up the costs of land, buildings, plant, machinery, general equipment, office equipment, and furniture that you think you’ll need before you can open your door for business.
It’s always better to over-estimate your capital costs. You’ll be surprised how quickly unforeseen costs can add up.
While asset costs can be spread out over a number of years for accounting purposes if the item has a long lifespan, you probably will still need to allow for the full value as you’ll need to have the capital to pay for them up front.
To open our café for business, we’ll need to complete a fit out of the existing premises and buy several pieces of equipment.
- Two custom-made Italian espresso machines at $6,000 each - $12,000
- Industrial-sized oven - $5,500
- Computerised ordering system - $3,000
- Seven tables constructed of recycled mahogany at $300 - $2,100
- 30 matching chairs at $70 - $2,100
- Cutlery, china and other materials - $2,000
- Sub total - $26,700
- Budget unforeseen costs, installation charges, and delivery - $5,000
- Total - $31,700
Loans and repayments
Borrowing money from your local bank or financial institution is simple and structured – but interest and repayments add up and can affect the long-term profitability of your business.
Borrowing from a bank feels safe and predictable, but remember what you’re being sold is debt – and often at higher than market average interest rates.
You need to exercise due diligence by analysing the total costs, including any fees, before factoring them into a cash flow forecast to see if the debt is manageable.
If you think you have a feasible lending option on the table, dig deeper by creating a long-range forecast based on market trends, like an ongoing increase in material costs or an increase in demand for your product.
Also look at the impact on cash flow of missing a debt repayment. Factor in the fees so you’re informed in advance of the repercussions.
Download this Cash flow forecast template so you can complete this calculation.
The bank I use for personal banking has given me the best offer on a business loan, as they don’t want me starting up a banking relationship of any kind with a competitor.
They’ve offered a business loan with a three month fixed interest rate of 12% with no extra fees for early repayment. I could also make repayments monthly, which would suit the expected cash flow for my heat pump maintenance and repair business.
However, at 12%, the repayments could account for 20% of my fixed costs in the first phase of my business when cash flow will be paramount
Working capital is the money you need to cover your expenses until your business is generating enough cash to pay for them.
It is unrealistic to expect that once you have bought the capital items you can open your doors and expect a normal month's worth of business to immediately arrive. You’ll need some money in the bank to enable you to pay the monthly bills until your business becomes established—a milestone that many start-up businesses underestimate.
To work out how much money you need in the bank before you open your doors for business, you’ll need to estimate your monthly expenses such as your lease/mortgage, raw materials and employee wages or salaries.
- My monthly working capital:
- Raw materials: $3,000
- Business lease: $1,600
- Car and travel expenses: $300
- Phone, tolls, Internet connection: $120
- Electricity: $300
- Insurance: $60
- Total (minimum) monthly expenses: $5,380.
Asking family and friends for capital is the next least risky option.
Business expenses are usually divided into two main groups: variable expenses and overheads. Variable expenses vary in proportion to your sales – so, for example, the amount you spend on raw materials making tables will vary depending on the number of tables you actually make.
Overheads on the other hand are the fixed costs of running your business. Whether you sell one table or 5,000 a month, you’ll still have fixed costs to pay.
Note that some overheads can have a variable element. For example, your power bill could shoot up if you’re using a lot of machinery to complete a large order or salaries could increase if you take on temps.
My monthly overheads:
- Advertising: $800
- Electricity: $500
- Freight: $600
- Employee salaries: $10,000
- Insurance: $120
- Lease payments: $3,000
- Loan repayments: $1,500
- Packaging: $80
- Total monthly costs: $16,600.
Your profit requirements
Your new venture will need to generate profits each year to meet your requirements. Profits are needed to generate an acceptable return on investment (ROI) and pay salaries or wages.
So before you continue with your idea, it’s worthwhile completing a break even calculation that shows how much you need to sell each week to meet your profit needs.
The break-even point is the point at which your company makes enough money to cover its costs. Past this point, the company starts to make profit. Finding the break-even point through the analysis of costs is one of the most useful processes an entrepreneur can undertake.
If you invest $100,000 setting up the business, then you’ll want a return for the risk. The return should be a much higher percentage than if you had left the money in the bank. Let's say 15%, so in this example, you would want a net profit of $15,000 per year.
Download this Excel Break even calculator so you can complete this calculation.
- My monthly business overheads: $13,000
- My required annual salary: $55,000
- How much annual profit I require to generate growth: $15,000
- My investment in the business: $40,000
- My intended return on investment: 7%
- How many weeks per year that I’ll be open for business: 50
I’ll need to generate a total of $4,576 in profit to meet my objectives.
You should now have a better understanding of the financial potential of your business idea.
Keep gathering as much information and advice as you can to make sure you make the right decision. Now’s the time to write a business plan that firms up your strategy for success. Having a firm grasp on your start-up finances will make business planning easier.
Conduct some market research with potential customers and business advisers to find out if there will be enough demand for your business.
General tips to keep in-mind as you progress with your business idea:
Revisit your costs regularly
Realised you’ll need to purchase a few more big-ticket items? Make sure you feed these into your calculations. Factoring in all costs gives you an overview of your cash situation and reduces the likelihood of under-borrowing
Get professional advice
You don’t have to go it alone – there are plenty of places to turn for guidance. Assemble a support network of trusted advisers such as your lawyer, accountant and business mentor. Business.govt.nz offer real-life business case studies, or we can help you get in touch with an experienced business mentor.
Protect your ideas
If you’re looking for additional funds, an investment relationship could see you transfer equity or assets to an investor. Before this happens, make sure your intellectual property is appropriately protected. Consulting an experienced IP lawyer is your best bet.
You can now open your Action Plan.
Your Action Plan is a Microsoft Word compatible document that you can save and edit.
It outlines all the action points and ideas that you recorded as you worked through this module.