Financial goals for a new venture
A financial goal says what money result the business wants and by when. Good goals are SMART: Specific, Measurable, Achievable, Relevant, Time-bound.
- Sales goal: "Sell 60,000 worth of products in the first 12 months."
- Profit goal: "Reach break-even by month 8 and a 10% profit margin in year 2."
- Cash goal: "Always keep at least 2,000 in the bank."
- Debt goal: "Repay the 7,000 loan within 2 years."
- Personal goal: "Pay myself 1,500 a month from month 10."
"Make lots of money" is not SMART: it cannot be measured and has no deadline.
Start-up capital and sources of financing
Start-up capital is all the money needed before the business earns enough to pay its way:
- One-time costs: equipment, furniture, renovation, licences and permits, website, first stock.
- Working capital cushion: cash to pay rent, wages and bills for the first few months while sales grow.
Example: equipment 12,000 + setup 3,000 + cushion 5,000 = 20,000.
Sources of financing
| Equity (owned money) | Debt (borrowed money) |
|---|---|
| Owner's savings; family and friends who become part-owners; partners; angel investors and venture capital; crowdfunding | Bank loans and lines of credit; government start-up loans; supplier credit; credit cards (costly) |
Grants do not have to be repaid. Equity does not have to be repaid but gives away part of the ownership; debt must be repaid with interest but the owner keeps control. Lenders usually want the owner to put in some of their own money and may ask for collateral (an asset pledged as security).
The cash-flow projection
A cash-flow projection predicts cash coming in and going out each month, usually for 12 months.
Opening cash + cash receipts โ cash payments = closing cash; this month's closing cash is next month's opening cash.
| Month | Opening | In | Out | Closing |
|---|---|---|---|---|
| 1 | 5,000 | 2,000 | 6,000 | 1,000 |
| 2 | 1,000 | 3,000 | 6,000 | โ2,000 |
| 3 | โ2,000 | 6,000 | 6,000 | โ2,000 |
| 4 | โ2,000 | 8,000 | 6,000 | 0 |
Why it matters: a business can be profitable on paper and still run out of cash, because customers pay late or big bills come early. The projection shows shortfalls in advance so the owner can arrange a line of credit, delay a purchase, or collect faster. Banks almost always ask for one.
Operating budget, break-even and dealing with banks
Operating budget
Plans the year's revenue and expenses: sales forecast, cost of goods sold, fixed costs (rent, insurance, salaries), variable costs (materials, packaging), and the expected profit. Actual results are compared with it each month.
Break-even point
Break-even units = Fixed costs รท (Selling price โ Variable cost per unit). With fixed costs 4,000, price 50 and variable cost 30: 4,000 รท 20 = 200 units. Below 200 = loss; above = profit.
Handling cash and working with financial institutions
- Open a separate business bank account; deposit cash daily with a deposit slip.
- Pay by cheque, card or bank transfer, keeping receipts; reconcile the bank statement monthly.
- Use online banking and point-of-sale payment systems safely.
- To borrow, prepare a business plan, financial statements and cash-flow projection; compare interest rates, fees and repayment terms; build a good credit history.
Key formulas and definitions
- Start-up capital = one-time costs + working capital cushion
- Closing cash = opening cash + cash in โ cash out
- Break-even units = fixed costs รท (price โ variable cost per unit)
- Contribution per unit = price โ variable cost
- Profit = revenue โ total costs
Worked examples
1. A bakery needs an oven 9,000, fit-out 4,500, permits 500 and wants a 4-month cushion of 1,500 per month. Find start-up capital.
One-time = 9,000 + 4,500 + 500 = 14,000. Cushion = 4 ร 1,500 = 6,000. Start-up capital = 20,000.
2. Opening cash 3,000. Month 1: in 4,000, out 5,500. Month 2: in 5,000, out 5,500. Find the closing cash each month.
Month 1: 3,000 + 4,000 โ 5,500 = 1,500. Month 2: 1,500 + 5,000 โ 5,500 = 1,000.
3. Fixed costs 6,000 a month; price 25; variable cost 10. Find break-even units.
Contribution = 15. Break-even = 6,000 รท 15 = 400 units.
4. In the example above, the business sells 500 units. What is the profit?
Revenue 12,500 โ (6,000 + 5,000) = 1,500. Or (500 โ 400) ร 15 = 1,500.
5. Start-up capital is 20,000. The owner has 8,000 and the bank will lend up to 50% of start-up capital. How much more is needed from other sources?
Loan = 10,000. 8,000 + 10,000 = 18,000. Still need 2,000 (family, grant or crowdfunding).
6. Is "grow sales" a SMART goal? Rewrite it.
No: not measurable or time-bound. Better: "Increase monthly sales from 4,000 to 5,000 by the end of June."
Common mistakes
- Forgetting the cash cushion and counting only equipment in start-up costs.
- Confusing profit with cash. A profitable business can still run out of cash.
- Using the selling price instead of contribution (price โ variable cost) in the break-even formula.
- Starting each month of the cash-flow projection at zero instead of carrying forward last month's closing cash.