Monitor and review costs
Monitoring and reviewing costs involves establishing a strong focus on estimating sales, forecasting expenditures, and monitoring cash flows. Many startup businesses have an accountant or financial officer as part of the management team, or they can access this expertise through networks or advisory committees or an accountancy firm.
You need to understand several important concepts at this startup stage:
If the product or service does not currently exist in the market, base estimates on similar or substitute products or services. Estimate sales not on what is sold to your distributor or retailer, but on customer sales. Seek professional advice to add credibility to your estimates.
A lot of business costs are fixed, and it is relatively easy to forecast general and administrative expenses. The bulk of costs will be salaries, rent and marketing budgets.
These are typically under-estimated by businesses. Generate a list, calculate costs then add 15% as a buffer. The list includes furniture and fixtures, equipment, office supplies, initial inventory, employee wages, employee training, deposits for electricity/lease, insurance and accounting/legal fees.
A cash flow statement is critical. It states the cash position of the business at specific points in time. This is important information for everyone, including lenders and investors. As with startup costs, include a safety margin.
This calculation estimates when the business will make a profit. To break even and to make a profit, the business must generate a volume of sales of its products or services that covers both the fixed and variable running costs.
Ratios are a useful tool for understanding financial information. Most books on accounting or financial investing in the share market list these ratios. The best known include:
- liquidity ratios (the ability of the business's assets to be converted into cash)
- profitability ratios (profit margin, return on assets)
- leverage ratio (degree to which the business relies on debt to survive)