Even if you only jotted down your ideas on the back of an envelope, you probably have a general idea of the business plan for your young business. Now, you need to develop a more complete plan, when and how you plan to get your business up and operating. For instance, your plan might revolve around the objective to have your line of skin care products in national distribution within five years.
As a next step, it’s important to decide on a business structure and develop a capitalization strategy. This is the financial projections section of the business plan, and includes your estimates of revenue, expenses and profit over the near future. Once in place, it provides you with two invaluable roadmaps: a long-term funding plan to take your business national within five years and a short-term spending plan to help you better allocate your cash outlay along the way and reduce the risk that your business will burn through capital before you reach your five-year goal.
Creating a capitalization strategy requires an understanding of the business activities your company will need to finance the growth and expansion you’ve planned, including estimates of how much these activities will cost, and how to best appropriate sources of financing.
Running the Numbers
Once you understand the business activities you need to finance, you can develop an annual budget and estimate your capital requirements for at least the next two years. Many experts recommend a three-pronged approach to planning: worst-case, realistic, and best-case scenarios. This can help decrease the likelihood of underestimating your capital requirements, which could cause you to run out of money or pass up potential opportunities. You may want to consult outside sources, such as your accountant or banker, to ensure your budget is as accurate as possible. Your local chamber of commerce or a regional business association can help you estimate expenses such as utilities and payroll that tend to vary regionally. A professional association that represents your industry may have information about standard costs, margins, and financial ratios.
Sources of Capital
After researching your capital needs, you're ready to consider potential sources of funding. The table below lists several sources that entrepreneurs frequently use and the advantages and disadvantages of each.