initial capital in business plan

What is Start up Capital in Business: Insights and Strategies for Entrepreneurs

Pradeep bhanot.

• February 29, 2024

Introduction

Embarking on a new business journey? You’re brimming with innovative ideas and the drive to make waves. Yet, one common hurdle stands in your way: securing business startup capital.

Table of Contents

Welcome to the quest for startup capital, the vital spark for your new business engine. As startup founders of this is a critical requirement to fuel growth, so a critical element in the business plan.

My first startup was in the Silicon Valley as the CEO of DevPort. The founder, Shiraz, and I pitched many VCs and Angels to secure funding for our business venture. Our coach from Sequoia Capital which is one of the leading venture capital firms, educated us on different types of startup capital. This article covers much of what we learned.

What in the World is Startup Capital in Business?

In plain English, startup capital in business is the cash you need to cover startup costs. It’s the lifeline that pays for the company’s major initial costs – think office space, market research, and those first few rounds of caffeine that keep the dream alive.

For a software startup business, it is particularly useful to have a running prototype service. Funding will provide the ability to scale development, capture some early adopters, and marketing to get your revenue stream kick started.

Types of Startup Capital

Venturing into entrepreneurship without grasping startup capital types for external investment is like sailing without a compass: progress is possible, but directionless.

Let’s examine the options to ensure the best fit for your business’s growth.

1. Equity Financing

What it is : Equity financing involves selling a piece of your company (equity) in exchange for capital. This means investors get a share of your business and, typically, a say in how things are run.

Pros : The biggest perk? You’re not required to pay back the funds if your business goes under. Plus, it often comes with valuable mentorship and industry connections.

Cons : The downside is the dilution of your ownership and control over your company. Every investor gets a slice of the pie, potentially reducing your piece.

2. Debt Financing

What it is : Debt financing means taking out a business loan from financial institutions that you’ll need to repay over time, with interest. Business loans can come from banks, credit unions, or online lenders in the form of a business loan or credit line.

Pros : You retain full control and ownership of your business. Interest payments are also tax-deductible.

Cons : Repayment obligations for a business loan can be heavy, especially if your business doesn’t generate the expected cash flow. Plus, it usually requires collateral.

3. Angel Investors

What it is : Angel investors are wealthy individuals who provide capital for a business start-up, usually in exchange for convertible debt or ownership equity. They’re often retired entrepreneurs or executives, who may be interested in angel investing for reasons beyond pure monetary return.

Pros : In addition to funds, angel investors can offer invaluable advice, mentorship, and industry contacts. They may also be more willing to take risks on early-stage start ups.

Cons : Like venture capital, accepting angel investment often means giving up a share of your business. Angel investors may also seek involvement in business decisions.

4. Venture Capital

What it is : Venture capital funding is given to start ups and new businesses with perceived long-term growth potential by the venture capital firm. Venture capitalists provide startup capital with the intension of providing advice, so it is more like a partnership.

Pros : Significant capital injection, mentorship, and networking opportunities. Venture capitalists also bring expertise and resources to scale your business rapidly.

Cons : Highly competitive and not easily accessible for all start ups. It involves giving up a significant equity stake and, often, some degree of control over your company.

5. Personal Savings and Bootstrapping

What it is : Providing your own startup capital using your savings or generating business revenue that’s reinvested back into the business. Bootstrapping means raising capital without external help.

Pros : Full control over your business without any dilution of equity. You make all the decisions without needing approval from outside investors.

Cons : Limited by the amount of personal funds available, which can restrict growth. The financial risk is all on you, which can be a heavy burden.

6. Crowdfunding

What it is : Crowdfunding platforms allow you to raise small amounts of startup funding from a large number of people, typically via the Internet. This can be in exchange for rewards, equity, or even new products.

Pros : Great way to validate your product or new businesses idea while simultaneously funding it. It also engages a community of supporters.

Cons : Requires a significant marketing effort when raising capital. Not reaching your startup capital funding goal can mean you get nothing (depending on the platform’s policies).

What it is : Grants are non-repayable funds or products disbursed by grant makers, often a government department, corporation, foundation, or trust, to a recipient. These are typically awarded to businesses that meet specific criteria, such as innovation in certain fields.

Pros : It’s free money that doesn’t need to be repaid and doesn’t dilute your ownership.

Cons : The application process can be complex, competitive, and time-consuming. Grants are also usually very specific about what the funds can be used for.

Seed Capital vs. Startup Capital: What Is the Difference?

Delineating the early financial phases of a venture is essential. This section contrasts seed capital with startup capital, the pivotal funds that nurture a business’s inception and generate revenue.

Seed Capital: Planting the First Financial Seed

Definition and Purpose : Funds from seed investors is often the very first investment a new business secures, aimed at validating the business idea, conducting market research, and covering initial operational costs. It’s about proving the concept can work.

Amounts and Expectations : The seed round for young companies is usually smaller than later rounds of financing. This is early-stage investment used to fund feasibility and conceptual work.

Startup Capital: Fueling the Business Launch

Definition and Purpose : Startup capital refers to the funds needed to launch the business operations fully. This capital is used for initial product development, marketing, and hiring key staff to bring the business idea to market.

Amounts and Expectations : When you raise startup capital rounds, the amounts are generally larger than the seed capital round, reflecting the increased valuation of the business and the move toward market entry and future growth.

How To Choose the Ideal Startup Capital for Your Business?

Deciding on the best type of startup capital for your business isn’t just about weighing the pros and cons.

It’s about introspection, understanding your business’s unique needs, and aligning your startup capital funding strategy with your long-term vision. Here’s how you can navigate this decision-making process:

1. Assess Your Business Stage and Needs

Early Stage vs. Growth Stage : Early-stage companies might find more value in angel investors or crowdfunding to get off the ground, while growth-stage businesses could be more attractive to venture capital firms looking to scale.

Financial Requirements : Quantify how much startup capital you need to reach your next business milestone. This helps in choosing funding sources that can meet these requirements without over-diluting equity or accruing unmanageable debt.

2. Consider Your Tolerance for Risk Personal

Financial Risk : Using personal savings or assets for bootstrapping involves significant personal financial risk. Ensure you’re comfortable with the potential outcomes.

Debt Risk : Debt financing requires confidence in your business’s revenue generation capabilities. Defaulting on loans can have serious consequences, so consider the stability and predictability of your cash flow.

3. Evaluate Your Willingness to Share Control and Profits

Equity Financing : Taking on investors means sharing decision-making power and future profits. If you’re open to collaboration and mentorship, and willing to share the pie for the sake of growth, equity financing could be beneficial.

Private Equity companies typically have a 5-year horizon when they provide startup capital which should be enough to be cashflow positive.

Independence : If retaining control and independence is paramount, look towards bootstrapping, loans, or crowdfunding models that allow you to retain full ownership.

4. Reflect on the Level of Support and Networks You Need

Beyond Capital : Some forms of raising startup capital come with mentorship, industry contacts, and operational support. Venture capital and angel investors often provide strategic guidance that can be invaluable for navigating early challenges.

Solo Journey : If you prefer to lean on your own expertise or have a strong support network, want to maintain your ownership stake, less intrusive forms of capital might be more suitable.

5. Long-Term Business Goals and Vision

Growth Trajectory : A high-growth startup aiming for rapid expansion may benefit from venture capital or angel investment to fuel their ambitions.

Sustainable Growth : Businesses aiming for steady, sustainable growth might find debt financing or bootstrapping more aligned with their goals, avoiding the pressure to scale at an aggressive pace.

6. Compliance with Funding Requirements and Obligations

Grants and Crowdfunding : Understand the specific requirements and obligations of less traditional funding sources. Some grants may restrict how funds can be used, and crowdfunding campaigns often require rewards or returns to backers.

7. Conduct a Reality Check

Market Validation : Ensure there’s a market demand for your product or service. This not only affects your ability to raise capital but also determines the most receptive source of funding.

The technology market is particularly subject to trends. My startup get to market as technology exchanges where cooling, so we missed the market trend that would have made us cool. Monitoring industry analyst hype-cycles can be useful for timing market entry. Your product or service could be before its time. Investors want to see pull from a market or customer segment to feel good about their bet on you.

Investor Appeal : Be honest about your business’s appeal to investors. High-risk, high-reward ventures might attract venture capitalists, while niche or lifestyle businesses might not.

Angels want to see that you have a path to profitability. This can be as little as a year. Make sure you have a clear idea of your planned milestones so they can see you have executed against your plan when you review your progress.

Final Thoughts on Choosing Your Path

Choosing the right startup capital is crucial, blending financial strategy with your business’s vision and goals.

Seek advice from mentors and advisors to navigate financing options to raise capital. Ensure your choice aligns with your growth ambitions outlined in a solid business plan.

Raising Startup Capital: Preparing Your Pitch

Crafting a pitch that sticks: the elevator pitch.

In a world where attention spans are shorter than ever, your elevator pitch needs to be sharp, engaging, and memorable. Tell your story in a way that leaves them wanting more – because first impressions are everything.

The Devil’s in the Details: What Investors Are Really Looking For

Also, beyond the flash and flair, investors are digging for substance. They want to see a strong business idea backed by market research, a clear path to generating revenue, and a team that can execute the vision. Don’t just sell them on the dream – show them the blueprint.

Common Pitfalls and How to Dodge Them

Entrepreneurial paths often include missteps like underestimating needed startup capital, leading to early financial strain. Equally damaging is overpromising to investors—transparency is key to long-term partnerships. I have worked with executives who over promise to the board, creating stress for everyone.

Be wary in negotiations; excitement can overshadow critical terms in agreements. Scrutinize equity stakes and repayment terms to ensure they align with your startup’s goals and capabilities. Securing the right capital on favorable terms is crucial for success.

Wrapping It Up: Key Takeaways and Your Next Steps

Finding the right startup capital is vital, yet varies for each business. It’s about adaptability, resilience, and focus on your goal.

With a robust business plan and understanding of your financial needs, you’re set to turn dreams into realities. Keep in mind that 10 out of 11 startups fail.

Start laying your empire’s foundation brick by brick, refine your pitch, and embark on your entrepreneurial path with confidence.

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Startup capital: how entrepreneurs put their plans into motion.

• Published on: October 28, 2021
• Author: masschallenge

Wondering how to raise capital for a startup? You’re not alone. In the age of SaaS and mobile apps, thousands of aspiring entrepreneurs and business owners are looking for startup venture capital to bring their big ideas to the world.

Access to funding gives a growth advantage to new businesses. Companies with more startup capital can better increase market share in their industry and can afford to penetrate new markets. In comparison, bootstrapped companies short on funds must often make sacrifices that limit innovation and business expansion.

Unfortunately, it’s not always easy to get backing, which forces many founders to reach further into their own pockets and turn to credit lenders to cover costs, increasing their exposure to risk and financial stress. This article will explore startup capital options to show you how to raise funds without relying on your personal savings.

What is Startup Capital?

Startup capital refers to the money that entrepreneurs raise to meet the costs of starting a business venture. Common sources of startup capital often include angel investors, venture capitalists , and banks.

New companies use startup capital to cover various business expenses such as office space, payroll, research, product development, and marketing. Entrepreneurs typically provide compensation to the investors or institutions who provided the startup capital in the form of equity.

If the business grows in value, so does its equity pricing, providing investors with a significant return on investment. In the best-case scenarios, investors earn a positive return while the startup covers costs and can scale.

Types of Startup Capital

Getting the money together to launch a new business isn’t easy. The good news is that if you seek startup capital for your business, there are several options to choose from:

Self-funding

Self-funding, also known as bootstrapping, is when an entrepreneur uses their own funds to pay for a company’s expenses.

If you are the founder, you may need to draw on your savings, sell assets, use credit cards, or even take out a new mortgage on your home. While each self-funded method can help you raise the required money, it means you will be held personally liable, and therefore, includes a higher degree of risk.

Seed money, or seed capital , is money you acquire from close personal contacts—friends, family members, and acquaintances. 

As its name suggests, this type of capital “seeds” the beginning stages of the company to cover initial expenses like business plans and prototype development. Seed capital is not ideal as a long-term funding solution, but it can help your startup gain enough momentum to attract more significant investments.

Crowdfunding

Crowdfunding refers to the practice of raising capital from a large pool of investors. Each investor supplies a smaller sum of money and receives compensation via loan interest or other rewards. With enough micro-investors, you can source a large sum of funds. Kickstarter and GoFundMe are common online crowdfunding platforms.   

Business loans

You can always finance your startup via a business loan. Founders may leverage debt from a bank or start a credit line with suppliers to cover initial business expenses.

Providers of business loans are typically more risk-averse, so if you plan to use traditional loan options to raise money, you should craft a comprehensive and convincing business plan beforehand.

Venture capital

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Venture capitalists or angel investors may offer promising startups large sums of cash to accelerate early growth. In the first quarter of 2021, over $288 billion of venturing funding occurred worldwide. Startup venture capital offers you better financial resources early on, but you do reward your investors with equity or profit-sharing that vests after a set period of time.

How to Raise Capital for a Startup

Raising startup capital requires thorough planning and extensive networking. At a minimum, business founders should complete the following steps to protect their business interests and improve the odds of obtaining suitable investment from external backers: 

Write a business plan

Profitable companies start with a bright idea or customer solution. But it is challenging to turn an idea into a well-run business. Startup investors understand the barriers that prevent efficient execution and demand that you outline your growth strategy. 

To attract the initial capital your startup requires, you need to clearly document the core function of your business, the potential market you serve, and what you plan to do with any startup capital in the form of a business plan.

You should include the following aspects in your business plan:

• Description of the company and what it provides
• Market research (of your customers and competitors)
• Company hierarchy and management structure
• Sales and marketing strategy

Estimate your startup costs

There are three stages to estimating startup costs. 

• First, identify the individual expenses you will have, such as office rent, supplies, salary, insurance, and marketing. 
• Secondly, calculate the total costs of these expenses. 
• Lastly, categorize your expenses as one-time or recurring costs to arrive at the true dollar amount of your funding needs.

Find investors

You must meet and network with angel investors and venture capitalists as they provide the upfront investments in your business. You can find investors at in-person events such as seminars, meetups, and business conferences. Business owners can also network with investors on online platforms like AngelList or Investor Hunt .

Look for accelerators

Accelerators offer entrepreneurs a fast track to raising startup capital. With an accelerator, founders gain access to vital support for product development, industry networking, technology experts, and startup investors.

For example, MassChallenge offers industry ( healthtech , fintech , blue tech etc) or location-specific zero-equity accelerators that allow you to compete for cash and additional prizes in a competition-based environment—without sacrificing ownership in your company.

Opportunities for Startups

It’s not easy for early-stage entrepreneurs to locate startup venture capital, expert advice, and business resources for product development, especially without giving up significant assets or equity in return. 

But MassChallenge and its global network of innovators create an environment that promotes access to funding, resources, and leadership. For decades, MassChallenge has worked alongside startups through its accelerator program to help launch, grow, and scale their businesses. 

We provide you with the right tools to disrupt the status quo in the U.S., Latin America, the Middle East, and Europe. For example, our HealthTech and FinTech industry verticals enable us to connect late-stage startups to industry players to spur innovation. And, our Bridge to MassChallenge program boosts startup ecosystems, local innovation, and corporate innovation.

Partnering with MassChallenge is a unique opportunity for several reasons:

• Inclusivity : MassChallenge does not discriminate based on nationality, geography, or industry. If you want to create a new product, disrupt an inefficient market, or create real change, we want to work with you.
• Access to global contacts : Even if your target market is local, your business resources can come from across the world. Tap into our global network of contacts to launch and scale your startup.
• One-on-one mentorship : It’s one thing to attend a speech alongside thousands of others. But receiving one-on-one mentorship and feedback about your startup from industry experts helps you locate inefficiencies and improve business outcomes with effective leadership. 
• Industry-leading partnerships : Entrepreneurs often struggle to partner with large organizations within their space. Through MassChallenge, you can form impactful relationships with industry-leading government entities and companies.
• Equity retention : MassChallenge has a zero-equity approach. Startups keep all of their equity and compete to receive financial rewards and other incentives in all of our accelerator programs.

Are you curious about our accelerators? Explore the MassChallenge programs that are helping startup founders ignite their business growth and create meaningful change.

New to MassChallenge?

Visit the join section of our site to learn more about the organization and how you may benefit by getting involved., upcoming events, may dallas impact lunch & learn.

• May 16, 2024
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Planning, Startups, Stories

Tim berry on business planning, starting and growing your business, and having a life in the meantime., business plan financials: starting costs.

It’s really important to have an idea of what you need before you start. Continuing with my series on standard business plan financials , startups need to project starting costs. Starting costs set up a starting balance, which is necessary to plan cash flow. And the starting costs are critical to determining whether a startup can bootstrap or needs outside funding. For existing companies that already have financial results, projections start with the expected ending balance of the previous period. But for startups, it’s about starting costs.

Starting costs are essentially the sum of two kinds of spending. You can estimate them both in two simple lists:

• Startup expenses : These are expenses that happen before the beginning of the plan, before the first month of operations. For example, many new companies incur expenses for legal work, logo design, brochures, site selection and improvements, and signage. If there is a business location, then normally the startup pays rent for a month or more before opening. And if employees start receiving compensation before the opening, then those disbursements are also startup expenses.
• Startup assets : Typical startup assets are cash (the money in the bank when the company starts), business or plant equipment, office furniture, vehicles, and starting inventory for stores or manufacturers.

A Simple Starting Costs Example

I’ve used a bicycle store as an example in several posts that are part of this series of standard business plan financials. Here’s a visual in spreadsheet form, of sample starting costs for a hypothetical bicycle store.

Notice that the lists for estimating starting costs, on the left in the illustration above, are matched to another list of starting funding, on the right side of the illustration. Books have to balance, so the initial estimates need to include not just the money you spend, but also where it comes from. In the case above, Garrett had to find $124,500, and you can see that he financed it with Accounts Payable, debt, and investment in various categories.

Another Simple Starting Costs Example

Here is another simple example: the starting costs worksheet that Magda developed for the restaurant I used for a sample sales forecast . Magda’s list includes rent and payroll, the same as in her monthly spending, but here they are included in starting costs because these expenses happen before the launch.

I included rent and payroll because they point out the importance in timing. The difference between these as startup expenses and running expenses is timing, and nothing else. Magda could have chosen to plan startup expenses as a running worksheet on expenses, starting a few months before launch, as in the illustration below. The launch in this case is early January, so the expenses for October through December are startup expenses. I prefer the separate lists, because I like the way the two lists create an estimate of starting costs. But that’s an option.

The LivePlan Alternative

If you’re a LivePlan user, the LivePlan interface assumes this method and has a more intuitive interface than the spreadsheet version I’m showing in this post. For LivePlan, you start your plan when you start spending, regardless of launch date. So the spending you do for rent and salaries and such, before launch, is part of the flow, as above. Also, LivePlan has its own guided way of helping you figure out what assets you need, how much they cost, and how you are going to finance starting costs, to set up your balance. And the LivePlan cash flow estimator will help you decide how much cash you need, so you don’t have to follow the spreadsheet method here (below).

How to Estimate Your Starting Costs

Obviously the goal with starting costs isn’t just to track them, but to estimate them ahead of time so you have a better idea, before you start a new business, of what the financial costs might be. Breaking the items down into a practical list makes the educated guess a lot easier. Ideally, you know the business you want to start, you are already familiar with the industry, so you can do a useful estimate for most of the startup costs from your own experience. If you don’t have enough firsthand knowledge, then you should be talking to people who do. For others, such as insurance, legal costs, or graphic design for logos, call some providers or brokers, and talk to partners; educate those guesses.

Starting Cash is the Hardest and Most Important

How much cash do you need in the bank, as you launch? That’s usually the toughest starting cost question. It’s also prone to misinformation, such as those alleged rules of thumb you can find everywhere, saying you need to have a year’s worth of expenses, or six months’ worth, before you start. It’s not that simple. For most businesses, the startup cash isn’t a matter of what’s ideal, or what some expert says is the rule of thumb – it’s how much money you have, can get, and are willing to risk.

The best way is to do a Projected Cash Flow while leaving the supposed starting cash balance at zero, which shows how much (at least in theory, according to assumptions) the startup really needs in cash to support the business as it grows, before it reaches a monthly cash flow break-even point. Magda did that to determine the $12,000 needed as starting cash for her restaurant. Note how, in the illustration here, the lowest point in cash is slightly less than $12,000:

That low point comes, theoretically, in the third month of the business, March. The low point is $11,609. Obviously that’s just an educated guess, but it’s based on assumptions for sales forecast, expense budget, and important cash flow factors including sales on account and purchasing inventory. So it’s better than a stab in the dark, or some rule of thumb. Just as an example, the total spending with the estimates shown here, the theoretical “year’s worth of spending,” is $182,000 (which you don’t see on the illustration, by the way, but take my word for it). The total for the first six months is $93,000. If Magda sticks to those old formulas, she can’t start the business. She is able to raise enough money, between loans and her savings, to put $12,000 into the starting cash balance. So that’s what she does. Then she launches and continues to have her monthly reviews, and watch the performance of all key indicators very carefully.

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How to Estimate Start Up Capital for Starting a Business

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How to write a restaurant proposal, why is it important for entrepreneurs to develop financial plans for their companies.

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Startup capital includes funds for any expenses to be incurred before launching a company, and capital required after launch to run the company until it reaches positive cash flow -- when revenues are higher than expenses.

Accurately estimating the capital required to start a company is critical because running out of capital can cause the company to fail in its very early stages. With careful estimates based on sound assumptions, the chances of a cash shortfall are reduced.

Create a Detailed Business Plan

Creating a business plan with forecasts is essential to figuring out how much you'll need to launch and run your business, advises the U.S. Small Business Administration. Describe the products and services you will be offering, and the strategies you intend to deploy to introduce them to the market.

Determine when each strategy will be implemented, such as the schedule for advertising and what media you intend to use. Include a budget that includes your costs to launch the business and run it for the first year. Including revenue projections will help you estimate how much money you will need to get your business off the ground and operate it during year one.

Calculate Product Development Costs

Consult with your vendors or suppliers, and obtain estimates of what these costs will be. Work out precise estimates rather than wide ranges.

Prepare a marketing budget. The strategic marketing plan provides you with information about what your marketing tactics will be. Now attach numbers to these tasks based on consultation with vendors you have selected and researching what other companies in your industry typically spend.

Put together a personnel budget. Forecast the number of employees and management team members you will need for the first three years. Break this out by department so you make sure you don't overlook any functional areas.

Forecast facilities and equipment cost. Determine how much space your venture needs to conduct operations. This can be office space, retail space, and production and warehouse space depending on the type of company. Ask real estate professionals for information about the rate per square foot for the type of space you will need. Remember to include office equipment leases in your equipment forecast, for items such as computer workstations and telephone systems.

Forecast general and administrative expenses. These costs include items such as office supplies, travel, insurance, legal and accounting fees.

Separate Launch and Operating Expenses

Separate out the costs that will be incurred before launching the company from those that will be incurred on an ongoing basis after the company is launched, recommends small-business website BPlans .

Complete a revenue forecast. Build financial models with assumptions about unit sales volume and price, and then generate a spreadsheet with forecast revenues, month by month for the first three years. Total up the expenses you forecast for each of these months, and calculate how long it will take for the company to reach breakeven cash flow. Total the cash deficit for these months.

Compute your total startup capital. Add up capital needed prior to launch and the capital required to fund the cash deficit. This is your total startup capital. It is extremely difficult to accurately forecast how quickly revenues will grow in a start up venture. Take this into account by adding 10 percent to 20 percent to the capital you think you need. Low-ball your projected income estimates to give you a cushion, as well.

• BPlans: Estimating Realistic Startup Costs
• Schedule each new person you hire to come on board when they are absolutely needed, not before, so you can save on personnel costs.
• Plan on securing a short-term lease for the minimum square footage you need to get started, with an option to acquire more space if the company grows as fast as you forecast.
• It is extremely difficult to accurately forecast how quickly revenues will grow in a start up venture. Take this into account by adding 10 percent to 20 percent to the capital you think you need.

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1.4: Chapter 4 – Initial Business Plan Draft

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• Page ID 21278

• Lee A. Swanson
• University of Saskatchewan

Learning Objectives

After completing this chapter, you will be able to

• Develop a comprehensive business plan draft

This chapter describes an approach to writing your draft business plan. It also outlines the elements of a comprehensive business plan that can be used as a template for starting your business plan.

Figure 7 – Initial Business Plan Draft (Illustration by Lee A. Swanson)

Effective Business Plans

Effective business plans

• Provide statements that are backed by evidence or data
• Include context and references with every table, figure, or illustration
• Include relevant, clear, concise tables and financial information, and exclude unnecessary material
• Present timelines for distinct purposes
• Use clear sections customized to the particular business or its environment rather than generic sections

Writing the Draft Business Plan

Although there are various ways to approach the task of writing a draft business plan, one effective approach is to do the following:

• This will provide you with a template for the information needed for your plan.
• You can copy and paste the results of your essential initial research into the sections of your business plan template where you believe that they can be used to support or justify the strategies and other decisions you will later describe in those sections. Of course, you can later move those parts of your environmental scan as needed as you develop your plan. In general, this strategy results in a stronger business plan .
• Completing this step will give you the satisfaction of seeing some of your work so far taking shape in the form of a business plan.
• Also, inserting the results from your environmental scan into the relevant sections of your plan should later provide you with the stimulus and support you will need to develop solid, realistic, evidence-based strategies and decisions for those sections.
• Incorporate your business model into your new business plan template. As there is no section in a business plan in which you specifically describe your business model, you will need to incorporate your business model elements into appropriate sections of your plan.
• You will normally include both information that you got from particular sources and information based on an assumption you made (and that you might intend to replace later with more accurate information from valid sources).

Follow these practices as you develop your plan:

• When you do this, you help establish your credibility as a business plan writer, and your business plan’s credibility. It also might save you time later when you discover that you need to add a similar item along with its cost to your list.
• Note: Do not reinvent the wheel by “inventing” your own method to reference your sources and do not use multiple methods. Use one (and only one) proper and well-established referencing method, like APA. This will improve the degree of professionalism of your plan.
• Note: if you are an expert source on something—maybe you are a construction expert that business plan readers will trust to do estimates on building costs—you should establish your credentials and clearly indicate when some of the information in your plan is based on your own expert knowledge.
• When you flag your assumptions in this way, you can quickly and easily see what information needs to be replaced with sourced information before you finalize your business plan.
• Projecting realistic sales can be difficult, but setting up a method for doing so early gives business plan writers a significant start toward completing their business plan. A well-developed sales model that takes advantage of the powers of electronic spreadsheets gives business plan writers the opportunity to relatively quickly and easily make necessary changes to their assumptions and overall estimates when needed.
• When you use the schedules provided on the spreadsheet templates, and any others that you add, you will be well on your way to developing the financial component of your business plan.

General Business Plan Format

Letter of transmittal.

A letter of transmittal is similar to the cover letter of a resume. The letter of transmittal should be tailored to the reader, clearly identifying the customized ask of the potential investor or lender. It should be short and succinct, delineating the ask (i.e. funding, specialized recruiting, purchasing a product or service, obtaining advice, etc.) within a few paragraphs. It should not summarize the business plan, as that is the job of the executive summary.

• Includes nice, catchy, professional, appropriate graphics to make it appealing for targeted readers

Executive Summary

• Can be longer than normal executive summaries—up to three pages
• Written after remainder of plan is complete
• Includes information relevant to targeted readers as this is the place where they are most likely to form their first impressions of the business idea and decide whether they wish to read the rest of the plan

Table of Contents

List of tables.

• References every table, figure, and appendix within the text of the plan so the relevance of each of these elements is clear.

List of Figures

Introduction.

• Indicates the purpose for the plan
• Appeals to targeted readers

Business Idea

• May include description of history behind the idea and the evolution of the business concept if relevant

Value Proposition

• Explains how your business idea solves a problem for your expected customers or otherwise should make them want to purchase your product or service instead of a competitor’s
• Outlines what you intend for the venture to be
• Inspires all members of the organization
• Helps stakeholders aspire to achieve greater things through the venture because of the general direction provided through the vision statement

After articulating a good vision, the business plan writer should consider what achieving the vision looks like. Many business plan writers write their vision and leave it at that. The problem with this approach is that they often then do not take the necessary steps to illustrate how the strategies they outline in their plan will move them toward achieving their vision. If they make this mistake, their strategies might indicate that they are fulfilling their current mission, but are not taking steps to move beyond that.

Vision statements should be clear with context throughout the business plan. For example, if the goal is to be the premier business operating in that industry in Saskatchewan, does that mean you have one location and are considered the best at what you do it even though you only have a small corner of the market, or does it mean that you have many locations across the province and enjoy a large market share?

• Should be very brief—a few sentences or a short paragraph
• Indicates what your organization does and why it exists—may describe the business strategy and philosophy
• Consists of five to ten short statements indicating the important values that will guide everything the business will do
• Outlines the personal commitments members of the organization must make, and what they should consider to be important
• Defines how people behave and interact with each other
• Should be reflected in all of the decisions outlined in the business plan, from hiring to promotions to location choices
• Helps the reader understand the type of culture and operating environment this business intends to develop

Major Goals

• Describes the major organizational goals
• Specific, Measurable, Action oriented, Realistic, and Timely [SMART]
• Realistic, Understandable, Measureable, Believable, and Achievable [RUMBA]
• Aligns with everything in plan
• Written, or re-written as the second last thing you do before finalizing your business plan by proofreading, polishing, and printing it (writing the Executive Summary is the final thing you should write)

Operating Environment

Trend analysis.

• However, consider whether this is the right place for this analysis: it may be better positioned, for example, in the Financial Plan section to provide context to the analysis of the critical success factors, or in the Marketing Plan to help the reader understand the basis for the sales projections.

Industry Analysis

• Includes an analysis of the industry in which this business will operate
• As above, consider whether this is the right place for this analysis: it may be better placed, for example, in the Marketing Plan to enhance the competitor analysis, or in the Financial plan to provide context to the industry standard ratios in the Investment Analysis section.

Of course, your trend analysis will also include a market-level analysis (using a set of questions, like those listed in Chapter 2) and a firm-level analysis (using tools like a SWOT Analysis / TOWS Matrix, various forms of financial analyses, a founder fit analysis, and so on), but those analyses are usually best placed in other sections of your plan to support the strategies and decisions you present there. The market-level analysis will inevitably fit in the Marketing Plan section, but the firm-level analysis might be spread across some or all of the Operating Plan, Human Resources Plan, Marketing Plan, and Financial Plan sections.

Operations Plan

• Given these constraints, what is your operating capacity (in terms of production, sales, etc.)?
• What is the work flow plan for your operation?
• What work will your company do and what work will you outsource?

Operations Timeline

• When will you make the preparations, such as registering the business name and purchasing equipment, to start the venture?
• When will you begin operations and make your first sales?
• When will other milestone events occur such as moving operations to a larger facility, offering a new product line, hiring new key employees, and beginning to sell products internationally?
• Sometimes it is useful to include a graphical timeline showing when these milestone events have occurred and are expected to occur.

Business Structure and other Set-up Elements

• Sole Proprietorship
• Partnership
• Limited Partnership
• Corporation
• Cooperative

Note: Your financial statements, risk management strategy, and other elements of your plan are affected by the type of legal structure you choose for your business. For example, all partnerships should have a clear agreement outlining the duties, expectations, and compensation of all partners as well as the process of dissolution. Spreadsheet templates are formatted for corporations and will need to be formatted for other forms of businesses.

• Zoning, equipment prices, suppliers, etc.
• Leasing terms, leasehold improvements, signage, pay deposits, etc.
• Getting business license, permits, etc.
• Setting up banking arrangements
• Setting up legal and accounting systems (or professionals)
• Ordering equipment, locks and keys, furniture, etc.
• Recruiting employees, setting up the payroll system and benefit programs, etc.
• Training employees
• Testing the products/services that will be offered
• Testing the systems for supply, sales, delivery, and other functions
• Creating graphics, logos, promotional methods, etc.
• Ordering business cards, letter head, etc.
• Setting up supplier agreements and outlining why those sellers are preferred
• Buying inventory, insurance, etc.
• Revising business plan
• And many more things, including, when possible, attracting purchased orders in advance of start-up through personal selling (by the owner, a paid sales force, independent representatives, or by selling through brokers wholesalers, catalogue houses, retailers), a promotional campaign, or other means

Note: As part of your business set-up, you need to determine what kinds of control systems you should have in place, establish necessary relationships with suppliers prior to your start-up, and generally deal with a list of issues like those mentioned above.

• What is required to start-up your business including the purchases and activities that must occur before you make your first sale?
• When identifying capital requirements for start-up, a distinction should be made between fixed capital requirements and working capital requirements.

Fixed Capital Requirements

• What fixed assets, including equipment and machinery, must be purchased so your venture can conduct its business?
• May also show the financing required, often in the form of longer-term loans

Working Capital Requirements

• What money is needed to operate the business (separately from the money needed to purchase fixed assets) including the money needed to purchase inventory and pay initial expenses?
• May also show the financing required. Working capital is usually financed with operating loans, trade credit, credit card debt, or other forms of shorter-term loans

Risk Management Strategies

• Enterprise – liability exposure for things like when someone accuses your employees or products you sell of injuring them
• Financial – securing loans when needed and otherwise having the right amount of money when you need it
• Operational – securing needed inventories, recruiting needed employees in tight labour markets, operating when customers you counted on not purchasing product as you had anticipated, managing theft, arson, and natural disasters like fires and floods, etc.
• Avoid – choose to avoid doing something, outsource, etc.
• Reduce – through training, assuming specific operational strategies, etc.
• Transfer – insure against, outsource, etc.
• Assume – self-insure, accept, etc.

Figure 8 – Risk Management Strategies (Illustration by Lee A. Swanson)

Operating Processes

• What operating processes will you apply?
• How will you ensure your cash is managed effectively?
• How will you schedule your employees?
• How will you manage your inventories?
• If you will have a workforce, how will you manage them?
• How will you bill out your employee time?
• How will you schedule work on your contracts?
• How you will manufacture your product (process flow, job shop, etc.?)
• How will you maintain quality?
• How will you institute and manage effective financial monitoring and control systems that provide needed information in a timely manner?
• How will you manage expansion?
• May include planned layouts for facilities
• What are your facility plans?
• Expressed as a set physical location
• Expressed as a set of requirements and characteristics
• How large will your facility be and why must it be this size?
• How much will it cost to buy or lease your facility?
• What utility, parking, and other costs must you pay for this facility?
• What expansion plans must be factored into the facility requirements?
• What transportation and storage issues must be addressed by facility decisions?
• What zoning and other legal issues must you deal with?
• What will be the layout for your facility and how will this best accommodate customer and employee requirements?

Organizational Structure

• May include information on Advisory Boards or Board of Directors from which the company will seek advice or guidance or direction
• May include an organizational chart
• Can be a nice lead-in to the Human Resources Plan

Human Resources Plan

• How do you describe your desired corporate culture?
• What are the key positions within your organization?
• How many employees will you have?
• What characteristics define your desired employees?
• What is your recruitment strategy? What processes will you apply to hire the employees you require?
• What is your leadership strategy and why have you chosen this approach?
• What performance appraisal and employee development methods will you use?
• What is your organizational structure and why is this the best way for your company to be organized?
• How will you pay each employee (wage, salary, commission, etc.)? How much will you pay each employee?
• What are your payroll costs, including benefits?
• What work will be outsourced and what work will be completed in-house?
• Have you shown and described an organizational chart?

Recruitment and Retention Strategies

• Includes how many employees are required at what times
• Estimates time required to recruit needed employees
• Employment advertisements
• Contracts with employment agency or search firms
• Travel and accommodations for potential employees to come for interviews
• Travel and accommodations for interviewers
• Facility, food, lost time, and other interviewing costs
• Relocation allowances for those hired including flights, moving companies, housing allowances, spousal employment assistance, etc.
• May include a schedule showing the costs of initial recruitment that then flows into your start-up expense schedules

Leadership and Management Strategies

• Outlines your leadership philosophy
• Explains why it is the most appropriate leadership approach for this venture
• What training is required because of existing rules and regulations?
• How will you ensure your employees are as capable as required?
• Health and safety (legislation, WHMIS, first aid, defibulators, etc.)
• Initial workplace orientation
• Financial systems
• Product features

Performance Appraisals

• Identifies how you will manage your performance appraisal systems

Health and Safety

• Notes any legal requirements (and also legal requirements for other issues that may be included in other parts of the plan)
• Identifies accreditation you might pursue, such as ISO 9000, and if so, evaluates the costs, benefits, and time frame
• Outlines training for employees, such as WHMIS training or machinery handling training

Compensation

• Always justifies your planned employee compensation methods and amounts
• Always includes all components of the compensation (CPP, EI, holiday pay, etc.)
• Identifies how you will ensure both internal and external equity in your pay systems
• Describes any incentive-based pay or profit sharing systems planned
• May include a schedule that shows the financial implications of your compensation strategy and supports the cash flow and income statements shown later

Key Personnel

• May include brief biographies of the key organizational people

Marketing Plan

• You must show evidence of having done proper research, both primary and secondary. If you make a statement of fact, you must back it up with properly referenced supporting evidence. If you indicate a claim is based on your own assumptions, you must back this up with a description as to how you came to the conclusion.
• It is a given that you must provide some assessment of the economic situation as it relates to your business. For example, you might conclude that the current economic crisis will reduce the potential to export your product and it may make it more difficult to acquire credit with which to operate your business. Of course, conclusions such as these should be matched with your assessment as to how your business will make the necessary adjustments to ensure it will thrive despite these challenges, or how it will take advantage of any opportunities your assessment uncovers.
• If you apply the Five Forces Model, do so in the way in which it was meant to be used to avoid significantly reducing its usefulness while also harming the viability of your industry analysis. This model is meant to be used to consider the entire industry, not a subcomponent of it (and it usually cannot be used to analyze a single organization).
• Your competitor analysis might fit within your assessment of the industry, or it might be best as a section within your marketing plan. Usually a fairly detailed description of your competitors is required, including an analysis of their strengths and weaknesses. In some cases, your business may have direct and indirect competitors to consider. Maintain credibility by demonstrating that you fully understand the competitive environment.
• Assessments of the economic conditions and the state of the industry appear incomplete without accompanying appraisals outlining the strategies the organization can/should employ to take advantage of these economic and industry situations. So, depending upon how you have organized your work, it is usually important to couple your appraisal of the economic and industry conditions with accompanying strategies for your venture. This shows the reader that you not only understand the operating environment, but that you have figured out how best to operate your business within that situation.
• Outlines an effective analysis of your venture (see the Organizational Analysis section below)

Market Analysis

• Usually contains customer profiles, constructed through primary and secondary research, for each market targeted
• Contains detailed information on the major product benefits you will deliver to the markets targeted
• Describes the methodology used and the relevant results from the primary market research completed
• If there was little primary research completed, justifies why it is acceptable to have done little of this kind of research and/or indicate what will be done and by when
• Includes a complete description of the secondary research conducted and the conclusions reached
• Define your target market in terms of identifiable entities sharing common characteristics. For example, it is not meaningful to indicate you are targeting Canadian universities. It is, however, useful to define your target market as Canadian university students between the ages of 18 and 25, or as information technology managers at Canadian universities, or as student leaders at Canadian universities. Your targeted customer should generally be able to make or significantly influence the buying decision.
• You must usually define your target market prior to describing your marketing mix, including your proposed product line. Sometimes the product descriptions in business plans seem to be at odds with the described target market characteristics. Ensure your defined target market aligns completely with your marketing mix (including product/service description, distribution channels, promotional methods, and pricing). For example, if the target market is defined as Canadian university students between the ages of 18 and 25, the product component of the marketing mix should clearly be something that appeals to this target market.
• Carefully choose how you will target potential customers. Should you target them based on their demographic characteristics, psychographic characteristics, or geographic location?
• You will need to access research to answer this question. Based on what you discover, you will need to figure out the optimum mix of pricing, distribution, promotions, and product decisions to best appeal to how your targeted customers make their buying decisions.

Competition

• However, this information might fit instead under the market analysis section.
• Describes all your direct competitors
• Describes all your indirect competitors
• If you include a competitor positioning map, insure that the x-axis and y-axis are meaningful. Often, competitor maps include quality and price as axes. Unless you can clearly articulate the distinction between high quality and low quality, it may be more valuable to have more meaningful axes or describe your value proposition relative to your competitors in the absence of a positioning map.

Figure 9 – Competitor Positioning Map (Illustration by Lee A. Swanson)

• You must clearly communicate the answers to these questions in your business plan in order to attract the needed support for your business. One caution is that it may sound appealing to claim you will provide a superior service to the existing competitors, but the only meaningful judge of your success in this regard will be customers. Although it is possible some of your competitors might be complacent in their current way of doing things, it is very unlikely that all your competitors provide an inferior service to that which you will be able to provide.

Marketing Strategy

• Covers all aspects of the marketing mix: your promotional decisions, product decisions, distribution decisions, and pricing decisions
• Outlines how you plan to influence your targeted customers to buy from you (your optimum marketing mix, and why is this one better than the alternatives)

Organizational Analysis

• Leads in to your marketing strategy or is positioned elsewhere depending upon how your business plan is best structured
• If doing so, ALWAYS ensure this analysis results in more than a simple list of internal strengths and weaknesses and external opportunities and threats. A SWOT analysis should always prove to the reader that there are organizational strategies in place to address each of the weaknesses and threats identified and to leverage each of the strengths and opportunities identified.
• An effective way to ensure an effective outcome to your SWOT Analysis is to apply a TOWS Matrix approach to develop strategies to take advantage of the identified strengths and opportunities while mitigating the weaknesses and threats. A TOWS Matrix evaluates each of the identified threats along with each of the weaknesses and then each of the strengths. It does the same with each of the identified opportunities. In this way strategies are developed by considering pairs of factors.
• The TOWS Matrix is a framework with which to help you organize your thoughts into strategies. Most often you would not label a section of your business plan as a TOWS Matrix because this would not add value for the reader. Instead, you should describe the resultant strategies—perhaps while indicating how they were derived from your assessment of the strengths, weaknesses, opportunities, and threats. For example, you could indicate that certain strategies were developed by considering how internal strengths could be employed toward mitigating external threats faced by the business.

Product Strategy

• If your product or service is standardized, you will need to compete on the basis of something else—like a more appealing price, having a superior location, better branding, or improved service. If you can differentiate your product or service, you might be able to compete on the basis of better quality, more features, appealing style, or something else. When describing your product, you should demonstrate that you understand this.

Pricing Strategy

• If you intend to accept payment by credit card (which is probably a necessity for most companies), you should be aware of the fee you are charged as a percentage of the value of each transaction. If you don’t account for this you risk overstating your actual revenues by perhaps one percent or more.
• Sales forecasts must be done on at least a monthly basis if you are using a projected cash flow statement. These must be accompanied by explanations designed to establish their credibility for readers of your business plan. Remember that many readers will initially assume your planned time frames are too long, your revenues are overstated, and you have underestimated your expenses. Well crafted explanations for all of these numbers will help establish credibility.

Distribution Strategy

• If you plan to use e-commerce, you should include all the costs associated with maintaining a website and accepting payments over the Internet.

Promotions Strategy

• As a new entrant into the market, must you attract your customers away from your competitors they currently buy from or will you be creating new customers for your product or service (i.e. not attracting customers away from your competitors)?
• If you are attracting customers away from competitors, how will these rivals respond to the threat you pose to them?
• If you intend to create new customers, how will you convince them to reallocate their dollars toward your product or service (and away from other things they want to purchase)?
• In what ways will you communicate with your targeted customers? When will you communicate with them? What specific messages do you plan to convey to them? How much will this promotions plan cost?
• If your entry into the market will not be a threat to direct competitors, it is likely you must convince potential customers to spend their money with you rather than on what they had previously earmarked those dollars toward. In your business plan you must demonstrate an awareness of these issues.
• Consider listing the promotional methods in rows on a spreadsheet with the columns representing weeks or months over probably about 18 months from the time of your first promotional expenditure. This can end up being a schedule that feeds the costs into your projected cash flow statement and from there into your projected income statements.
• If you phone or visit newspapers, radio stations, or television stations seeking advertising costs, you must go only after you have figured out details like on which days you would like to advertise, at what times on those days, whether you want your print advertisements in color, and what size of print advertisements you want.
• Carefully consider which promotional methods you will use. While using a medium like television may initially sound appealing, it is very expensive unless your ad runs during the non-prime times. If you think this type of medium might work for you, do a serious cost-benefit analysis to be sure.
• Some promotional plans are developed around newspaper ads, promotional pamphlets, printing business cards, and other more obvious mediums of promotion. Be certain to, include the costs of advertising in telephone directories, sponsoring a little league soccer team, producing personalized pens and other promotional client give-always, donating items to charity auctions, printing and mailing client Christmas cards, and doing the many things businesses find they do on-the-fly. Many businesses find it to be useful to join the local chamber of commerce and relevant trade organizations with which to network. Some find that setting a booth up at a trade fair helps launch their business.
• If you are concerned you might have missed some of these promotional expenses, or if you want to have a buffer in place in case you feel some of these opportunities are worthwhile when they arise, you should add some discretionary money to your promotional budget. A problem some companies get into is planning out their promotions in advance only to reallocate some of their newspaper advertisement money, for example, toward some of these other surprise purposes resulting in less newspaper advertising than had been intended.

Financial Plan

• Contains financial statements
• Various funding options and exit strategies for potential investors
• Business valuation (be cautious not to over value your business)
• Break-even analysis

Business Valuation

There are a multitude of sophisticated business valuation methodologies. A rule of thumb for business valuations is a multiple of its earnings. For example, if the chosen multiple is five and the business’ earnings before taxes are $55M, the business’ valuation would be approximately $275M.

Break-Even Analysis

Break-Even Point = FC/(P-VC)

• FC = Fixed Costs
• P = Unit Price
• VC = Variable Cost

Example: If the business’ total fixed costs are $1,000,000.00, it costs $5.00 to produce the widget, and the business sells the widget for $7.00, the break-even point is 500,000 widgets.

• You will most certainly need to make monthly cash flow projections from business inception to possibly three years out. Your projections will show the months in which the activities shown on your fixed capital and working capital schedules will occur. This is nearly the only way to clearly estimate your working capital needs and, specifically, important things like the times when you will need to draw on or can pay down your operating loans and the months when you will need to take out longer-term loans with which to purchase your fixed assets. Without a tool like this you will be severely handicapped when talking with bankers about your expected needs. They will want to know how large of a line of credit you will need and when you anticipate needing to borrow longer-term money. It is only through doing cash flow projections that you will be able to answer these questions. This information is also needed to determine things like the changes to your required loan payments and when you can take owner draws or pay dividends.
• Your projected cash flows are also used to develop your projected income statements and balance sheets.

Pro forma Cash Flow Statements

Pro forma income statements, pro forma balance sheets, investment analysis, projected financial ratios and industry standard ratios, critical success factors (sensitivity analysis), list of items a business may need to purchase.

• Business license
• Registration for name, etc.
• Domain name registration
• Initial product inventory
• All the little things like curtains/blinds, decorations, microwave for staff room, etc.
• All the things needed to run the business from day #1 (like cutlery, plates, cooking pots, table settings etc. for restaurants; like towels, soap, etc. for gyms; like equipment and so on for manufacturing and service places)
• Set-up and testing of new facilities—new factories and offices do not operate at peak efficiency for some time after start-up because it takes time for the new systems to kick into high gear
• Professional services needed
• Lawyer’s fees to make sure agreements are solid
• Graphic designer or design company needed to develop visuals
• Accounting firm needed to set up initial systems
• Insurance—maybe not a direct cost to this one to account for
• Accounting system software
• Computer, printer, other things needed like scanner
• Office furniture
• Initial office supplies—paper, pens, etc.
• Internet/wifi
• Microwave and coffee maker and similar supplies for staff room or coffee room
• Bank fees—business banking is normally not free—might also need to have business cheques

Customer Interaction

• Cash register
• Loyalty cards/system

Production/Operations

• Safety equipment (fire extinguishers, AED)
• Security systems
• Equipment maintenance
• Janitorial services and cleaning supplies
• Bathroom supplies—toilet paper, soap, towels
• Membership costs for various associations, including the local chamber of commerce, any professional associations for the relevant industry, etc.
• Subscriptions for things like important trade publications, etc.
• Shelving and storage systems
• Even when not full restaurant, operations like coffee shops still require equipment like dishwasher
• Safety—prior to start-up and ongoing and for new employees
• Ads, travel expenses—flights, hotels, taxi rides, meal allowances, etc.—to recruit people through interviews, meeting meals, set up with real estate agents, etc.
• Website development
• Costs for setting up and managing social media (can take a lot of an employee’s time)
• Grand opening costs
• If buying, include property taxes and all utilities in cash flows and income statement and include building maintenance and maybe build up a reserve fund to pay for things like future roof repairs and needed renovations and upgrades
• If renting/leasing, include rental/least cost and whatever utilities are not included in rental/lease payment

Renovations

• Construction
• Utility hookups
• Inspections
• Interior signage
• Fencing, parking lot, exterior lighting, other exterior things

Risk Management

• Insurance (need to choose the types needed)
• Training costs
• Things like snow removal, de-icing sidewalks, etc.

Chapter Summary

This chapter described the basic elements of a comprehensive business plan.

• What Is Startup Capital?

• Startup Finance

Last Updated: December 19, 2023 By Michaela Dale

There are many different types of funding relevant to startups and their founders. When you’re in the beginning stages of running or launching a startup, you will likely need what is called startup capital. 

This guide answers the question, “What is startup capital?” It also breaks down the types you should look for in the early stages of your startup and the basics of raising startup capital.

Startup Capital: What It Is and How to Get It

What is startup capital? Startups need money not only to scale — but to survive. When you’re just starting out, you will need what is called ‘startup capital.’ This is capital that is used in the early stages of launching a startup . 

Startup capital is commonly used to do things like build a minimum viable product ( MVP ), conduct market research , secure office space, and finance initial expenses. However, it may also be used for steps further along in the startup process, such as building an initial team or even deploying your go-to-market strategy. 

Is Startup Capital Important?

Startup capital provides your new business with the financial tools to build a foundation for your company. From research and development to technology expenses, startup capital paves the road for your startup to reach important milestones.

Moreover, certain types of startup capital offer various benefits, including access to investor networks, startup resources, or discounts to useful software and platforms.

Types of Startup Capital

If you’re just starting out, you’re likely looking to secure pre-seed funding or seed funding. There are several types of startup capital that founders can obtain to launch, build, and grow their new business venture. Each type of startup capital has its advantages and disadvantages, as well as various requirements and use cases. These are a few of the types of startup capital for founders to consider during the early stages of their startup’s lifecycle. 

Bootstrapping 

Self-funding or bootstrapping is used most frequently in the early stages of a startup’s lifecycle. This involves the founder utilizing their own personal savings or income to fund their business. This is not usually a long-term funding option for high-growth startups. However, it can get businesses through crucial early stages, such as building an MVP or market research, setting them up to eventually take on additional funding with less debt or dilution upfront. 

Startup Loans 

Many entrepreneurs choose to obtain funding from banks in the form of startup or small business loans , a type of debt funding. This can be an effective way to extend the runway early on, increasing cash flow to help you get started building your business. While a business loan may have several advantages, it should be noted that it also may have requirements for business credit score and time in business. Plus, you will be required to pay this funding back with interest. 

Small business grants can be hard to come by, but they serve as an excellent way to get money for your startup without worrying about repayment. While grants are often thought of as free money for your business, they do come with strings attached in many cases. This may include restrictions on how money is spent as well as reporting requirements to the institution facilitating the grant. 

Venture Capital Firms

Venture capital (VC) is a type of equity funding obtained through a venture capital firm . Venture capitalists invest money into startups with the potential for high, rapid growth in order to achieve a high return on investment (ROI). Therefore, venture capital funding isn’t always the first choice for startup capital in the early stages. It is important to note that since this is a type of dilutive funding, in order to obtain it, you will do so in exchange for equity in your business. 

Angel Investors

Angel investors are individuals who invest money into new startups with high growth potential. Angel investors typically take on earlier stage, and therefore higher risk, investments than venture capital firms. For a new business that is likely to scale fast, angel investors might be an effective avenue for raising capital early.

How to Get Startup Capital

Once you’ve decided the type of startup capital that’s right for your business, how do you raise startup capital? The process to raise money for a business varies widely on the type of startup funding, with each having different requirements and application processes. However, there are a few things you can expect to need regardless of the type of funding you’re seeking. 

Write a Business Plan

If you haven’t already, you need to create your startup business plan . A business plan is a valuable asset for your business as well as a necessity to acquire funding from banks, venture capitalists, or angel investors. This document outlines the strategy for your business, important goals and milestones, a go-to-market strategy, and more valuable information about a startup. 

Create a Pitch Deck

If you choose to seek angel or venture capital investment, you will need a pitch deck . This is a short, succinct presentation about your startup that details what your company does, the problem it is solving, the target market, the market opportunity, and other valuable information to effectively convey the value your business will bring to potential investors. 

Visit our guide to creating a pitch deck to learn how to make one for your startup. 

Evaluate Startup Costs

Before you seek startup capital, you should have an understanding of the amount of money you need and where that money will be spent. To calculate your startup costs, you will need to determine the expenses required to start your business. This may include technology expenses, research and development, office space, or any necessary insurance or licensing costs. 

Open a Business Bank Account

This is usually one of the first steps that will follow forming your startup . If you haven’t opened a business bank account , this will be a necessary step before you obtain startup capital. Not only is it a valuable asset to your business, but a business bank is a requirement for most investors, startup loans, and grants. For the best business bank accounts for startups , check out our guide. 

Frequently Asked Questions

What is the difference between startup capital and working capital.

Working capital is the assessment of cash flow your startup has at its disposal to operate the business. Startup capital, alternatively, is money raised to support product development, business growth, office space, and more.

How do you calculate startup capital?

Calculating startup capital is the process of determining how much funding your new business will require to launch and grow in the early stages. To determine this, you will need to assess your business idea and business model, conduct market research, calculate expenses, and create financial forecasts.

What is the difference between startup capital and venture capital?

Startup capital is the money required to launch a new business venture. Venture capital funds are simply one type of startup funding that can be chosen when raising capital for a business.

How do I get capital for my startup?

Before raising startup capital, you first need to determine your startup costs, write a business plan, open a business bank account, and choose the type of startup business funding that is best for your startup's immediate needs. 

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What Is Capitalization of a Start-Up?

How start-up capitalization for small business works, types of small business capital, where to find start-up capital for your small business, frequently asked questions (faqs).

Kelvin Murray / Getty Images

Capitalization is the initial investment or seed money for a start-up that allows the business to launch and stay operational. It's often the investment made by the business owner, money borrowed from lenders, and funds from any other investors in the firm.

Key Takeaways

• Capitalization refers to raising funds for the operation and growth of the business.
• There are two main ways to raise capital: equity funding and debt funding.
• Bank loans are typically the most common and the largest source of capital for small businesses.

The term "capitalization" refers to raising funds for the operation and growth of the business. It can be used to:

• Pay for assets such as equipment, vehicles, and real estate
• Fund growth by purchasing inventory, hiring employees, financing receivables, and more
• Build a fund for emergency expenses       

Each small business has its own way of raising funds as we’ll see below, but most of them use a combination of different funding methods. Early-stage start-ups typically fund their business out of pocket or borrow money from family and friends. 

Once they have a viable business plan, start-ups can open their doors to obtain loans or invite external investors. 

Friends and family members can also become investors in your business if they buy equity or shares in your company. 

There are two main ways to raise capital: equity funding and debt funding. Capitalization can include both equity and debt, although companies typically prefer keeping debt to a minimum.

Equity Funding

Investors are financially secure individuals who buy shares or ownership in your company in exchange for money. In addition to monetary funding, equity investors may be experts in your field and provide valuable business advice.  

Unfortunately, in this model, you don’t retain full control over your business and may have to make decisions based on your investors’ inputs. In some cases, equity investors may also be entitled to a portion of profits.

The benefit is that you don’t have any monthly repayments and no high interest rates to worry about. You also benefit from the investors’ business experience and solid advice, especially if you’re new in your industry. 

Debt Funding

Debt is a loan issued to your company. You retain all shares of the company, but you have to pay back the money loaned to you, along with interest.

However, regular and timely repayment of the loan can build business credit, which will enable you to take bigger loans in the future, if required. Moreover, you can also deduct interest payments on your business income tax return.

Finding the start-up capital for your small business begins with identifying your business goals. Where do you want to be in the next few months and years? What are your financial goals and predictions? 

Outlining these goals can help you find the right options to raise capital. For example, ask yourself if your business needs quick cash and control over how to spend it, or if it would be better to get some advice on how to get the most bang for your buck. 

If you need money and control, you can look at loans, while if you’re okay with giving away a part of your ownership in exchange for funds and guidance, equity funding may be the right option for you. 

Once you’ve figured that out, you can start applying for loans or open your company to investments. 

Important: If you want to pursue investors, your business plan will have to show substantial growth within three to five years so the investors have a viable exit strategy.

What is the largest source of capital for a small business?

Bank loans are typically the most common and the largest sources of capital for small businesses . With various types of lenders and repayment options available to pick from, businesses can have the flexibility and a constant flow of cash while retaining control over their company. 

What is considered a small business?

The Small Business Administration defines a small business as a sole proprietorship , partnership, or corporation that is “not dominant in its field on a national basis.” Whether your business classifies as a small business varies by the industry you operate in and depends on the “average number of employees over the past 12 months or average annual receipts over the past three years.” Typically, small businesses have fewer than 1,500 employees and generate less than $40 million in revenue.

Sakshi Udavant covers small business finance, entrepreneurship, and startup topics for The Balance. For over a decade, she has been a freelance journalist and marketing writer specializing in covering business, finance, technology. Her work has also been featured in scores of publications and media outlets including Business Insider, Chicago Tribune, The Independent, and Digital Privacy News.

U.S. Senate Committee on Small Business & Entrepreneurship. “ Access to Capital .”

Library of Congress Research Guides: “ Types of Financing .”

Accion Opportunity Fund. “ What Investors Look for Before Investing in a Small Business .”

Iowa State University: Extension and Outreach. ” Types and Sources of Financing for Start-Up Businesses .”

Internal Revenue Service. “ Topic No. 505 Interest Expense .”

Small Business Administration. “ Fund Your Business .”

FDIC. “ 2018 Small Business Lending Survey .”

Small Business Administration. “ Does Your Small Business Qualify? ”

Updated on September 25, 2023

What is Startup Capital? - How It Works & Where To Find It

Reviewed by: Joe Templin , Charted Financial Consultant - CAP

Fact-checked by: Somer G. Anderson , PhD Finance - Maryville University

Startup capital is the amount of money that a business, which is just starting out, needs in order to become operational and to also become profitable. The money is usually provided by a third party or institution like a bank or financing company and in return for providing this startup capital, the third party usually requires some form of payment called a return on investment. 

How Startup Capital Works

When seeking initial capital investment, the first step is researching the potential market for your product or service. This is generally encapsulated in a business plan that includes a  SWOT analysis , your approach to  how to start a small business , a marketing plan, business start-up costs, and financial projections. Additionally, you'll need a pitch deck to present to potential investors.

The financials help you understand how much money you need from potential capital investment,   how long it will last, and what kinds of returns you can expect on their initial capital investment. Additionally, it forecasts how long it will take before you reach profitability.

Once you have your plan in place, you'll   seek out investors that specialize in your niche .  The size of investment that you need determines what type of startup capital investment to search for.

The funder will perform due diligence on you, your idea, and the market potential for your product or service.   This helps them determine how much to invest and what they'll expect in return. It is wise to hire a lawyer to review the agreement to ensure that you receive fair terms before signing contracts.

What is Startup Capital Used For?

Startup investment money is usually very specific about what it will be spent on:  

The initial capital investment  needs to be adequate enough to carry your business until its revenues are self-sustaining. 

Where To Find Startup Capital

• Crowdfunding:  Raising small amounts of money from a large group of people. Crowdfunding can provide startup capital through investors or loans. Some crowdfunding platforms allow you to pre-sell your product or service to secure the funding you need to bring it to market without borrowing costs or giving up equity.
• Angel investors: Angel investors focus on startups that require smaller amounts of money. They tend to be   industry veterans who retired from their careers and now use their capital and expertise to help entrepreneurs launch their businesses.
• Startup Venture Capital: For companies with larger potential, startup venture capital investors are willing to take on substantial risk for the opportunity of a larger payday in the future. These investors usually seek an exit through a sale or IPO within three to five years to repay their investors and then they move on to the next idea.
• Business Loan: Banks and other lenders provide the cash you need in exchange for monthly payments of principal and interest. Startup business loans typically require a documented source of repayment and a personal guarantee. The maximum loan amount that you qualify for may be less than the full amount that you need.
• Family and friends: Many entrepreneurs reach out to family and friends to fund their initial capital investment since these people know and trust them. 
• Personal Savings and Assets:  Sometimes referred to as Bootstrapping. Business owners often launch their businesses in stages based on personal savings, home equity, credit cards, and other debt instruments. As revenues grow or other sources of money become available, the business expands when and where it can. This process may be slower, but it preserves your ownership and minimizes debt payments.

How to Raise Startup Capital

• Write a business plan: Your business plan provides a detailed roadmap for your business' success. It includes your marketing plan, financials, and other critical information that investors and lenders need to see.
• Develop your elevator pitch: When speaking with investors and lenders, your time is limited. Be sure that you can provide a compelling reason for them to want to know more in 30 seconds or less. Once you've caught their attention, then you can go into more detail and answer their questions. This should be before the business plan, not after
• Find the money: When considering  how to raise capital for a startup , seek out investors or lenders that match your strategy and cater to your niche. The best options often open other doors for you to new clients, suppliers, or advisors to accelerate your plan.
• Negotiate effectively: Everything is negotiable and the first offer is rarely their best offer. Don't be afraid to hold negotiations with multiple sources of startup capital at once to find the best deal for you.
• Stay focused on expenses: Once you have the money, watch every penny that you spend. Ideally, you won't have to seek out additional sources of capital for future growth. Remember, each extra round of funding means higher interest expenses or a reduced ownership stake for you.  It also takes your time away from building the business.

Advantages and Disadvantages of Startup Capital

When raising startup venture capital to fund your business, in addition to knowing your business start-up costs and legal requirements for starting a small business, you also need to know the advantages and disadvantages before accepting their money:

Advantages:

• Raise larger amounts of capital: When involving a lender or investor, you have greater access to startup capital than if you tried to fund the business solely from your personal savings.
• Better cash flow: Since the initial capital investment doesn't require monthly loan payments, you have more money to cover monthly expenses and reinvest in the business.
• No personal guarantees: When borrowing money for your business, most banks require a personal guarantee for the loan which puts your assets at risk in case the business fails or cannot make payments.
• Access to industry expertise: Many investors not only provide startup venture capital but ongoing advice and connections that can grow your business. In some cases, those connections can be more valuable than the money they invested.

Disadvantages:

Ownership stake is reduced: In exchange for the initial capital investment , the investors require shares of your company. Depending upon the size of the investment, they could become majority shareholders.

• Finding investors can be time-consuming and challenging: While you are out searching for investors, you aren't focused on your business. This process takes time and it doesn't always end with an agreement, so the time and effort could be for naught.
• Overall cost can be expensive: While you aren't making monthly payments, the cost of equity can be expensive when you consider how much you are giving up. These costs are generally only realized when the company is sold or when it goes public.
• Outsized growth expectations: Investors expect high returns on their capital, which can require you to scale the business quickly. In some cases, the high expectations force the business to grow faster than it is capable of or quicker than you'd like.

Final Tips on Acquiring Startup Capital 

While some people can fund the business with personal savings, most entrepreneurs need outside help, and arriving at a meeting with a potential investor fully prepared is vital: 

• Gather Documents 
• Know Where the Money Is Going
• Be Prepared and Ready to Answer Probing Questions
• Research The Investor
• Gain an Approximate Idea of What They Might Want In Return 
• Have an Experienced Professional Look at Your Business Plan
• Dress Like You Mean Business
• Be Open and Transparent With Everything 

Most initial capital investments are limited by your income, assets, and credit score . Raising startup venture capital from investors requires giving up a portion of your company's ownership. You need to be clear on what you are prepared and not prepared to give in return for acquiring the investment capital . Also, and this is vital, the question “Can I meet their financial expectations” must be considered thoroughly and not on the spot. Take their proposal home, take your time, and be realistic in being able to fulfill their investment expectations.    When you're looking for money to start your business idea, Torro is a good option for raising startup capital. 

• They can provide new businesses up to $575,000 with limited asset verification 
• No business appraisal 
• Little to no paperwork 
• Apply online 
• Receive fast approval
• Same-day funding 

• https://masschallenge.org/articles/startup-capital
• https://www.sba.gov/business-guide/plan-your-business/fund-your-business
• https://www.americanexpress.com/en-us/business/blueprint/resource-center/start/6-ways-to-start-a-business-with-no-money/
• https://hbr.org/1989/11/everything-you-dont-want-to-know-about-raising-capital

About the Authors

Written by: Lee Huffman

Lee Huffman spent 18 years as a financial planner and corporate finance manager before quitting his corporate job to write full-time in 2018.

Reviewed by: Joe Templin

Joe Templin is a Charted Financial Consultant (ChFC), MCEC, CEC, CLU and CAP with well over three decades consulting, coaching, and teaching. He's an author of the Amazon Kindle #1 New Release "Every Day Excellence" and host of The Human Kaizen Podcast.

Fact checked by: Somer G. Anderson Ph.D., CPA

Somer G. Anderson has been working in the Accounting and Finance industries for over 20 years as a financial statement auditor, a finance manager in a large healthcare organization, and a Finance and Accounting professor at Maryville University.

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What is a business plan?

1. write an executive summary, 2. describe your company, 3. state your business goals, 4. describe your products and services, 5. do your market research, 6. outline your marketing and sales plan, 7. perform a business financial analysis, 8. make financial projections, 9. summarize how your company operates, 10. add any additional information to an appendix, business plan tips and resources.

A business plan outlines your business’s financial goals and explains how you’ll achieve them over the next three to five years. Here’s a step-by-step guide to writing a business plan that will offer a strong, detailed road map for your business.

ZenBusiness

A business plan is a document that explains what your business does, how it makes money and who its customers are. Internally, writing a business plan should help you clarify your vision and organize your operations. Externally, you can share it with potential lenders and investors to show them you’re on the right track.

Business plans are living documents; it’s OK for them to change over time. Startups may update their business plans often as they figure out who their customers are and what products and services fit them best. Mature companies might only revisit their business plan every few years. Regardless of your business’s age, brush up this document before you apply for a business loan .

» Need help writing? Learn about the best business plan software .

This is your elevator pitch. It should include a mission statement, a brief description of the products or services your business offers and a broad summary of your financial growth plans.

Though the executive summary is the first thing your investors will read, it can be easier to write it last. That way, you can highlight information you’ve identified while writing other sections that go into more detail.

» MORE: How to write an executive summary in 6 steps

Next up is your company description. This should contain basic information like:

Your business’s registered name.

Address of your business location .

Names of key people in the business. Make sure to highlight unique skills or technical expertise among members of your team.

Your company description should also define your business structure — such as a sole proprietorship, partnership or corporation — and include the percent ownership that each owner has and the extent of each owner’s involvement in the company.

Lastly, write a little about the history of your company and the nature of your business now. This prepares the reader to learn about your goals in the next section.

» MORE: How to write a company overview for a business plan

The third part of a business plan is an objective statement. This section spells out what you’d like to accomplish, both in the near term and over the coming years.

If you’re looking for a business loan or outside investment, you can use this section to explain how the financing will help your business grow and how you plan to achieve those growth targets. The key is to provide a clear explanation of the opportunity your business presents to the lender.

For example, if your business is launching a second product line, you might explain how the loan will help your company launch that new product and how much you think sales will increase over the next three years as a result.

» MORE: How to write a successful business plan for a loan

In this section, go into detail about the products or services you offer or plan to offer.

You should include the following:

An explanation of how your product or service works.

The pricing model for your product or service.

The typical customers you serve.

Your supply chain and order fulfillment strategy.

You can also discuss current or pending trademarks and patents associated with your product or service.

Lenders and investors will want to know what sets your product apart from your competition. In your market analysis section , explain who your competitors are. Discuss what they do well, and point out what you can do better. If you’re serving a different or underserved market, explain that.

Here, you can address how you plan to persuade customers to buy your products or services, or how you will develop customer loyalty that will lead to repeat business.

Include details about your sales and distribution strategies, including the costs involved in selling each product .

» MORE: R e a d our complete guide to small business marketing

If you’re a startup, you may not have much information on your business financials yet. However, if you’re an existing business, you’ll want to include income or profit-and-loss statements, a balance sheet that lists your assets and debts, and a cash flow statement that shows how cash comes into and goes out of the company.

Accounting software may be able to generate these reports for you. It may also help you calculate metrics such as:

Net profit margin: the percentage of revenue you keep as net income.

Current ratio: the measurement of your liquidity and ability to repay debts.

Accounts receivable turnover ratio: a measurement of how frequently you collect on receivables per year.

This is a great place to include charts and graphs that make it easy for those reading your plan to understand the financial health of your business.

This is a critical part of your business plan if you’re seeking financing or investors. It outlines how your business will generate enough profit to repay the loan or how you will earn a decent return for investors.

Here, you’ll provide your business’s monthly or quarterly sales, expenses and profit estimates over at least a three-year period — with the future numbers assuming you’ve obtained a new loan.

Accuracy is key, so carefully analyze your past financial statements before giving projections. Your goals may be aggressive, but they should also be realistic.

NerdWallet’s picks for setting up your business finances:

The best business checking accounts .

The best business credit cards .

The best accounting software .

Before the end of your business plan, summarize how your business is structured and outline each team’s responsibilities. This will help your readers understand who performs each of the functions you’ve described above — making and selling your products or services — and how much each of those functions cost.

If any of your employees have exceptional skills, you may want to include their resumes to help explain the competitive advantage they give you.

Finally, attach any supporting information or additional materials that you couldn’t fit in elsewhere. That might include:

Licenses and permits.

Equipment leases.

Bank statements.

Details of your personal and business credit history, if you’re seeking financing.

If the appendix is long, you may want to consider adding a table of contents at the beginning of this section.

How much do you need?

with Fundera by NerdWallet

We’ll start with a brief questionnaire to better understand the unique needs of your business.

Once we uncover your personalized matches, our team will consult you on the process moving forward.

Here are some tips to write a detailed, convincing business plan:

Avoid over-optimism: If you’re applying for a business bank loan or professional investment, someone will be reading your business plan closely. Providing unreasonable sales estimates can hurt your chances of approval.

Proofread: Spelling, punctuation and grammatical errors can jump off the page and turn off lenders and prospective investors. If writing and editing aren't your strong suit, you may want to hire a professional business plan writer, copy editor or proofreader.

Use free resources: SCORE is a nonprofit association that offers a large network of volunteer business mentors and experts who can help you write or edit your business plan. The U.S. Small Business Administration’s Small Business Development Centers , which provide free business consulting and help with business plan development, can also be a resource.

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How to Prepare a Financial Plan for Startup Business (w/ example)

Free Financial Statements Template

Ajay Jagtap

• December 7, 2023

13 Min Read

If someone were to ask you about your business financials, could you give them a detailed answer?

Let’s say they ask—how do you allocate your operating expenses? What is your cash flow situation like? What is your exit strategy? And a series of similar other questions.

Instead of mumbling what to answer or shooting in the dark, as a founder, you must prepare yourself to answer this line of questioning—and creating a financial plan for your startup is the best way to do it.

A business plan’s financial plan section is no easy task—we get that.

But, you know what—this in-depth guide and financial plan example can make forecasting as simple as counting on your fingertips.

Ready to get started? Let’s begin by discussing startup financial planning.

What is Startup Financial Planning?

Startup financial planning, in simple terms, is a process of planning the financial aspects of a new business. It’s an integral part of a business plan and comprises its three major components: balance sheet, income statement, and cash-flow statement.

Apart from these statements, your financial section may also include revenue and sales forecasts, assets & liabilities, break-even analysis , and more. Your first financial plan may not be very detailed, but you can tweak and update it as your company grows.

Key Takeaways

• Realistic assumptions, thorough research, and a clear understanding of the market are the key to reliable financial projections.
• Cash flow projection, balance sheet, and income statement are three major components of a financial plan.
• Preparing a financial plan is easier and faster when you use a financial planning tool.
• Exploring “what-if” scenarios is an ideal method to understand the potential risks and opportunities involved in the business operations.

Why is Financial Planning Important to Your Startup?

Poor financial planning is one of the biggest reasons why most startups fail. In fact, a recent CNBC study reported that running out of cash was the reason behind 44% of startup failures in 2022.

A well-prepared financial plan provides a clear financial direction for your business, helps you set realistic financial objectives, create accurate forecasts, and shows your business is committed to its financial objectives.

It’s a key element of your business plan for winning potential investors. In fact, YC considered recent financial statements and projections to be critical elements of their Series A due diligence checklist .

Your financial plan demonstrates how your business manages expenses and generates revenue and helps them understand where your business stands today and in 5 years.

Makes sense why financial planning is important to your startup, doesn’t it? Let’s cut to the chase and discuss the key components of a startup’s financial plan.

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Key Components of a Startup Financial Plan

Whether creating a financial plan from scratch for a business venture or just modifying it for an existing one, here are the key components to consider including in your startup’s financial planning process.

Income Statement

An Income statement , also known as a profit-and-loss statement(P&L), shows your company’s income and expenditures. It also demonstrates how your business experienced any profit or loss over a given time.

Consider it as a snapshot of your business that shows the feasibility of your business idea. An income statement can be generated considering three scenarios: worst, expected, and best.

Your income or P&L statement must list the following:

• Cost of goods or cost of sale
• Gross margin
• Operating expenses
• Revenue streams
• EBITDA (Earnings before interest, tax, depreciation , & amortization )

Established businesses can prepare annual income statements, whereas new businesses and startups should consider preparing monthly statements.

Cash flow Statement

A cash flow statement is one of the most critical financial statements for startups that summarize your business’s cash in-and-out flows over a given time.

This section provides details on the cash position of your business and its ability to meet monetary commitments on a timely basis.

Your cash flow projection consists of the following three components:

✅ Cash revenue projection: Here, you must enter each month’s estimated or expected sales figures.

✅ Cash disbursements: List expenditures that you expect to pay in cash for each month over one year.

✅ Cash flow reconciliation: Cash flow reconciliation is a process used to ensure the accuracy of cash flow projections. The adjusted amount is the cash flow balance carried over to the next month.

Furthermore, a company’s cash flow projections can be crucial while assessing liquidity, its ability to generate positive cash flows and pay off debts, and invest in growth initiatives.

Balance Sheet

Your balance sheet is a financial statement that reports your company’s assets, liabilities, and shareholder equity at a given time.

Consider it as a snapshot of what your business owns and owes, as well as the amount invested by the shareholders.

This statement consists of three parts: assets , liabilities, and the balance calculated by the difference between the first two. The final numbers on this sheet reflect the business owner’s equity or value.

Balance sheets follow the following accounting equation with assets on one side and liabilities plus Owner’s equity on the other:

Here is what’s the core purpose of having a balance-sheet:

• Indicates the capital need of the business
• It helps to identify the allocation of resources
• It calculates the requirement of seed money you put up, and
• How much finance is required?

Since it helps investors understand the condition of your business on a given date, it’s a financial statement you can’t miss out on.

Break-even Analysis

Break-even analysis is a startup or small business accounting practice used to determine when a company, product, or service will become profitable.

For instance, a break-even analysis could help you understand how many candles you need to sell to cover your warehousing and manufacturing costs and start making profits.

Remember, anything you sell beyond the break-even point will result in profit.

You must be aware of your fixed and variable costs to accurately determine your startup’s break-even point.

• Fixed costs: fixed expenses that stay the same no matter what.
• Variable costs: expenses that fluctuate over time depending on production or sales.

A break-even point helps you smartly price your goods or services, cover fixed costs, catch missing expenses, and set sales targets while helping investors gain confidence in your business. No brainer—why it’s a key component of your startup’s financial plan.

Having covered all the key elements of a financial plan, let’s discuss how you can create a financial plan for your startup.

How to Create a Financial Section of a Startup Business Plan?

1. determine your financial needs.

You can’t start financial planning without understanding your financial requirements, can you? Get your notepad or simply open a notion doc; it’s time for some critical thinking.

Start by assessing your current situation by—calculating your income, expenses , assets, and liabilities, what the startup costs are, how much you have against them, and how much financing you need.

Assessing your current financial situation and health will help determine how much capital you need for your startup and help plan fundraising activities and outreach.

Furthermore, determining financial needs helps prioritize operational activities and expenses, effectively allocate resources, and increase the viability and sustainability of a business in the long run.

Having learned to determine financial needs, let’s head straight to setting financial goals.

2. Define Your Financial Goals

Setting realistic financial goals is fundamental in preparing an effective financial plan. So, it would help to outline your long-term strategies and goals at the beginning of your financial planning process.

Let’s understand it this way—if you are a SaaS startup pursuing VC financing rounds, you may ask investors about what matters to them the most and prepare your financial plan accordingly.

However, a coffee shop owner seeking a business loan may need to create a plan that appeals to banks, not investors. At the same time, an internal financial plan designed to offer financial direction and resource allocation may not be the same as previous examples, seeing its different use case.

Feeling overwhelmed? Just define your financial goals—you’ll be fine.

You can start by identifying your business KPIs (key performance indicators); it would be an ideal starting point.

3. Choose the Right Financial Planning Tool

Let’s face it—preparing a financial plan using Excel is no joke. One would only use this method if they had all the time in the world.

Having the right financial planning software will simplify and speed up the process and guide you through creating accurate financial forecasts.

Many financial planning software and tools claim to be the ideal solution, but it’s you who will identify and choose a tool that is best for your financial planning needs.

Create a Financial Plan with Upmetrics in no time

Enter your Financial Assumptions, and we’ll calculate your monthly/quarterly and yearly financial projections.

Start Forecasting

4. Make Assumptions Before Projecting Financials

Once you have a financial planning tool, you can move forward to the next step— making financial assumptions for your plan based on your company’s current performance and past financial records.

You’re just making predictions about your company’s financial future, so there’s no need to overthink or complicate the process.

You can gather your business’ historical financial data, market trends, and other relevant documents to help create a base for accurate financial projections.

After you have developed rough assumptions and a good understanding of your business finances, you can move forward to the next step—projecting financials.

5. Prepare Realistic Financial Projections

It’s a no-brainer—financial forecasting is the most critical yet challenging aspect of financial planning. However, it’s effortless if you’re using a financial planning software.

Upmetrics’ forecasting feature can help you project financials for up to 7 years. However, new startups usually consider planning for the next five years. Although it can be contradictory considering your financial goals and investor specifications.

Following are the two key aspects of your financial projections:

Revenue Projections

In simple terms, revenue projections help investors determine how much revenue your business plans to generate in years to come.

It generally involves conducting market research, determining pricing strategy , and cash flow analysis—which we’ve already discussed in the previous steps.

The following are the key components of an accurate revenue projection report:

• Market analysis
• Sales forecast
• Pricing strategy
• Growth assumptions
• Seasonal variations

This is a critical section for pre-revenue startups, so ensure your projections accurately align with your startup’s financial model and revenue goals.

Expense Projections

Both revenue and expense projections are correlated to each other. As revenue forecasts projected revenue assumptions, expense projections will estimate expenses associated with operating your business.

Accurately estimating your expenses will help in effective cash flow analysis and proper resource allocation.

These are the most common costs to consider while projecting expenses:

• Fixed costs
• Variable costs
• Employee costs or payroll expenses
• Operational expenses
• Marketing and advertising expenses
• Emergency fund

Remember, realistic assumptions, thorough research, and a clear understanding of your market are the key to reliable financial projections.

6. Consider “What if” Scenarios

After you project your financials, it’s time to test your assumptions with what-if analysis, also known as sensitivity analysis.

Using what-if analysis with different scenarios while projecting your financials will increase transparency and help investors better understand your startup’s future with its best, expected, and worst-case scenarios.

Exploring “what-if” scenarios is the best way to better understand the potential risks and opportunities involved in business operations. This proactive exercise will help you make strategic decisions and necessary adjustments to your financial plan.

7. Build a Visual Report

If you’ve closely followed the steps leading to this, you know how to research for financial projections, create a financial plan, and test assumptions using “what-if” scenarios.

Now, we’ll prepare visual reports to present your numbers in a visually appealing and easily digestible format.

Don’t worry—it’s no extra effort. You’ve already made a visual report while creating your financial plan and forecasting financials.

Check the dashboard to see the visual presentation of your projections and reports, and use the necessary financial data, diagrams, and graphs in the final draft of your financial plan.

Here’s what Upmetrics’ dashboard looks like:

8. Monitor and Adjust Your Financial Plan

Even though it’s not a primary step in creating a good financial plan, it’s quite essential to regularly monitor and adjust your financial plan to ensure the assumptions you made are still relevant, and you are heading in the right direction.

There are multiple ways to monitor your financial plan.

For instance, you can compare your assumptions with actual results to ensure accurate projections based on metrics like new customers acquired and acquisition costs, net profit, and gross margin.

Consider making necessary adjustments if your assumptions are not resonating with actual numbers.

Also, keep an eye on whether the changes you’ve identified are having the desired effect by monitoring their implementation.

And that was the last step in our financial planning guide. However, it’s not the end. Have a look at this financial plan example.

Startup Financial Plan Example

Having learned about financial planning, let’s quickly discuss a coffee shop startup financial plan example prepared using Upmetrics.

Important Assumptions

• The sales forecast is conservative and assumes a 5% increase in Year 2 and a 10% in Year 3.
• The analysis accounts for economic seasonality – wherein some months revenues peak (such as holidays ) and wanes in slower months.
• The analysis assumes the owner will not withdraw any salary till the 3rd year; at any time it is assumed that the owner’s withdrawal is available at his discretion.
• Sales are cash basis – nonaccrual accounting
• Moderate ramp- up in staff over the 5 years forecast
• Barista salary in the forecast is $36,000 in 2023.
• In general, most cafes have an 85% gross profit margin
• In general, most cafes have a 3% net profit margin

Projected Balance Sheet

Projected Cash-Flow Statement

Projected Profit & Loss Statement

Break Even Analysis

Start Preparing Your Financial Plan

We covered everything about financial planning in this guide, didn’t we? Although it doesn’t fulfill our objective to the fullest—we want you to finish your financial plan.

Sounds like a tough job? We have an easy way out for you—Upmetrics’ financial forecasting feature. Simply enter your financial assumptions, and let it do the rest.

So what are you waiting for? Try Upmetrics and create your financial plan in a snap.

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with step-by-step Guidance & AI Assistance.

Frequently Asked Questions

How often should i update my financial projections.

Well, there is no particular rule about it. However, reviewing and updating your financial plan once a year is considered an ideal practice as it ensures that the financial aspirations you started and the projections you made are still relevant.

How do I estimate startup costs accurately?

You can estimate your startup costs by identifying and factoring various one-time, recurring, and hidden expenses. However, using a financial forecasting tool like Upmetrics will ensure accurate costs while speeding up the process.

What financial ratios should startups pay attention to?

Here’s a list of financial ratios every startup owner should keep an eye on:

• Net profit margin
• Current ratio
• Quick ratio
• Working capital
• Return on equity
• Debt-to-equity ratio
• Return on assets
• Debt-to-asset ratio

What are the 3 different scenarios in scenario analysis?

As discussed earlier, Scenario analysis is the process of ascertaining and analyzing possible events that can occur in the future. Startups or businesses often consider analyzing these three scenarios:

• base-case (expected) scenario
• Worst-case scenario
• best case scenario.

About the Author

Ajay is a SaaS writer and personal finance blogger who has been active in the space for over three years, writing about startups, business planning, budgeting, credit cards, and other topics related to personal finance. If not writing, he’s probably having a power nap. Read more

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What Is Capital?

Understanding capital, how capital is used, business capital structure, types of capital, capital vs. money.

• Capital FAQs

The Bottom Line

Capital: definition, how it's used, structure, and types in business.

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

Capital is a broad term that can describe anything that confers value or benefit to its owners, such as a factory and its machinery, intellectual property like patents, or the financial assets of a business or an individual.

While money itself may be construed as capital, capital is more often associated with cash that is being put to work for productive or investment purposes. In general, capital is a critical component of running a business from day to day and financing its future growth.

Business capital may derive from the operations of the business or be raised from debt or equity financing. Common sources of capital include:

• Personal savings
• Friends and family
• Angel investors
• Venture capitalists (VC)
• Corporations
• Federal, state, or local governments
• Private loans
• Work or business operations
• Going public with an IPO

When budgeting, businesses of all kinds typically focus on three types of capital: working capital, equity capital, and debt capital. A business in the financial industry identifies trading capital as a fourth component.

Learn more about the types, sources, and structures of capital.

Key Takeaways

• The capital of a business is the money it has available to pay for its day-to-day operations and to fund its future growth.
• The four major types of capital include working capital, debt, equity, and trading capital. Trading capital is used by brokerages and other financial institutions.
• Any debt capital is offset by a debt liability on the balance sheet.
• The capital structure of a company determines what mix of these types of capital it uses to fund its business.
• Economists look at the capital of a family, a business, or an entire economy to evaluate how efficiently it is using its resources.

Investopedia / Matthew Collins

From the economists' perspective, capital is key to the functioning of any unit, whether that unit is a family, a small business, a large corporation, or an entire economy.

Capital assets can be found on either the current or long-term portion of the balance sheet. These assets may include cash, cash equivalents, and marketable securities as well as manufacturing equipment, production facilities, and storage facilities.

In the broadest sense, capital can be a measurement of wealth and a resource for increasing wealth. Individuals hold capital and capital assets as part of their net worth. Companies have capital structures that define the mix of debt capital, equity capital, and working capital for daily expenditures that they use.

Capital is typically cash or liquid assets being held or obtained for expenditures. In a broader sense, the term may be expanded to include all of a company’s assets that have monetary value, such as its equipment, real estate, and inventory. But when it comes to budgeting, capital is cash flow.

In general, capital can be a measurement of wealth and also a resource that provides for increasing wealth through direct investment or capital project investments. Individuals hold capital and capital assets as part of their net worth. Companies have capital structures that include debt capital, equity capital, and working capital for daily expenditures.

How individuals and companies finance their working capital and invest their obtained capital is critical for their prosperity.

Capital is used by companies to pay for the ongoing production of goods and services to create profit. Companies use their capital to invest in all kinds of things to create value. Labor and building expansions are two common areas of capital allocation. By investing capital, a business or individual seeks to earn a higher return than the capital's costs.

At the national and global levels, financial capital is analyzed by economists to understand how it is influencing economic growth. Economists watch several metrics of capital including personal income and personal consumption from the Commerce Department’s Personal Income and Outlays reports. Capital investment also can be found in the quarterly Gross Domestic Product report.

Typically, business capital and financial capital are judged from the perspective of a company’s capital structure. In the U.S., banks are required to hold a minimum amount of capital as a risk mitigation requirement (sometimes called economic capital ) as directed by the central banks and banking regulations.

Other private companies are responsible for assessing their capital thresholds, capital assets, and capital needs for corporate investment. Most of the financial capital analysis for businesses is done by closely analyzing the balance sheet.

A company’s balance sheet provides for metric analysis of a capital structure, which is split among assets, liabilities, and equity. The mix defines the structure.

Debt financing represents a cash capital asset that must be repaid over time through scheduled liabilities. Equity financing, meaning the sale of stock shares, provides cash capital that is also reported in the equity portion of the balance sheet. Debt capital typically comes with lower rates of return and strict provisions for repayment.

Some of the key metrics for analyzing business capital are weighted average cost of capital, debt to equity, debt to capital, and return on equity.

Below are the top four types of capital that businesses focus on in more detail

Debt Capital

A business can acquire capital by borrowing. This is debt capital, and it can be obtained through private or government sources. For established companies, this most often means borrowing from banks and other financial institutions or issuing bonds. For small businesses starting on a shoestring, sources of capital may include friends and family, online lenders, credit card companies, and federal loan programs.

Like individuals, businesses must have an active credit history to obtain debt capital. Debt capital requires regular repayment with interest. The interest rates vary depending on the type of capital obtained and the borrower’s credit history.

Individuals quite rightly see debt as a burden, but businesses see it as an opportunity, at least if the debt doesn't get out of hand. It is the only way that most businesses can obtain a large enough lump sum to pay for a major investment in the future. But both businesses and their potential investors need to keep an eye on the debt to capital ratio to avoid getting in too deep.

Issuing bonds is a favorite way for corporations to raise debt capital, especially when prevailing interest rates are low, making it cheaper to borrow. In 2020, for example, corporate bond issuance by U.S. companies soared 70% year over year, according to Moody's Analytics. Average corporate bond yields had then hit a multi-year low of about 2.3%.

Equity Capital

Equity capital can come in several forms. Typically, distinctions are made between private equity, public equity, and real estate equity.

Private and public equity will usually be structured in the form of shares of stock in the company. The only distinction here is that public equity is raised by listing the company's shares on a stock exchange while private equity is raised among a closed group of investors.

When an individual investor buys shares of stock, they are providing equity capital to a company. The biggest splashes in the world of raising equity capital come, of course, when a company launches an initial public offering (IPO). In 2021, the Duolingo IPO valued the company at $5 million and shook the Nasdaq market.

Working Capital

A company's working capital is its liquid capital assets available for fulfilling daily obligations. It is calculated through the following two assessments:

• Current Assets – Current Liabilities
• Accounts Receivable + Inventory – Accounts Payable

Working capital measures a company's short-term liquidity. More specifically, it represents its ability to cover its debts, accounts payable, and other obligations that are due within one year.

Note that working capital is defined as current assets minus its current liabilities. A company that has more liabilities than assets could soon run short of working capital.

Trading Capital

Any business needs a substantial amount of capital to operate and create profitable returns. Balance sheet analysis is central to the review and assessment of business capital.

Trading capital is a term used by brokerages and other financial institutions that place a large number of trades daily. Trading capital is the amount of money allotted to an individual or a firm to buy and sell various securities.

Investors may attempt to add to their trading capital by employing a variety of trade optimization methods. These methods attempt to make the best use of capital by determining the ideal percentage of funds to invest with each trade.

In particular, to be successful, traders need to determine the optimal  cash reserves required for their investing strategies.

A big brokerage firm like Charles Schwab or Fidelity Investments will allocate considerable trading capital to each of the professionals who trade stocks and other assets for it.

At its core, capital is money. However, for financial and business purposes, capital is typically viewed from the perspective of current operations and investments in the future.

Capital usually comes with a cost. For debt capital, this is the cost of interest required in repayment. For equity capital, this is the cost of distributions made to shareholders. Overall, capital is deployed to help shape a company's development and  growth .

What Does Capital Mean in Economics?

To an economist, capital usually means liquid assets. In other words, it's cash in hand that is available for spending, whether on day-to-day necessities or long-term projects. On a global scale, capital is all of the money that is currently in circulation, being exchanged for day-to-day necessities or longer-term wants.

What Is the Capital in a Business?

The capital of a business is the money it has available to fund its day-to-day operations and to bankroll its expansion for the future. The proceeds of its business are one source of capital.

Capital assets are generally a broader term. The capital assets of an individual or a business may include real estate, cars, investments (long or short-term), and other valuable possessions. A business may also have capital assets including expensive machinery, inventory, warehouse space, office equipment, and patents held by the company.

Many capital assets are illiquid—that is, they can't be readily turned into cash to meet immediate needs.

A company that totaled up its capital value would include every item owned by the business as well as all of its financial assets (minus its liabilities). But an accountant handling the day-to-day budget of the company would consider only its cash on hand as its capital.

What Are Examples of Capital?

Any financial asset that is being used may be capital. The contents of a bank account, the proceeds of a sale of stock shares, or the proceeds of a bond issue all are examples. The proceeds of a business's current operations go onto its balance sheet as capital.

What Are the 3 Sources of Capital?

Most businesses distinguish between working capital, equity capital, and debt capital, although they overlap.

• Working capital is the money needed to meet the day-to-day operation of the business and pay its obligations promptly.
• Equity capital is raised by issuing shares in the company, publicly or privately, and is used to fund the expansion of the business.
• Debt capital is borrowed money. On the balance sheet, the amount borrowed appears as a capital asset while the amount owed appears as a liability.

The word capital has several meanings depending on its context.

On a company balance sheet, capital is money available for immediate use, whether to keep the day-to-day business running or to launch a new initiative. It may be defined on its balance sheet as working capital, equity capital, or debt capital, depending on its origin and intended use. Brokerages also list trading capital; that is the cash available for routine trading in the markets.

When a company defines its overall capital assets, it generally will include all of its possessions that have a cash value, such as equipment and real estate.

When economists look at capital, they are most often looking at the cash in circulation within an entire economy. Some of the major national economic indicators are the ups and downs of all of the cash in circulation. One example is the monthly Personal Income and Outlays report from the U.S. Bureau of Economic Analysis.

Federal Reserve Board. " Policy Tools: Reserve Requirements ."

Moody's Analytics. " Corporate Bond Issuance Boom May Steady Credit Quality, On Balance ."

St. Louis Fed. " Moody's Seasoned Aaa Corporate Bond Yield ."

CNBC. " Duolingo Closes Up 36% in Nasdaq Debut ."

Bureau of Economic Analysis. " Personal Income ."

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Plan Projections

ideas to numbers .. simple financial projections

Home > Business Plan > Funding Requirements in a Business Plan

Funding Requirements in a Business Plan

… our funding requirements are …

The summary given in the funding requirement section should be consistent with the rest of the business plan. The amount needed, and when it is needed should follow from the detailed financial projections, and the purpose of the funding, sales and marketing, hire of employees, to achieve a milestone etc. should again link in with the rest of the plan,

Funding Requirements Presentation

This is part of the financial projections and Contents of a Business Plan Guide , a series of posts on what each section of a simple business plan should include. The next post in this series is the final section, and deals with the planned exit for investors.

About the Author

Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

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Investment Company Business Plan

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Investment Company

Executive summary executive summary is a brief introduction to your business plan. it describes your business, the problem that it solves, your target market, and financial highlights.">.

This sample plan was created for a hypothetical investment company that buys other companies as investments.  In this sample, the hypothetical Venture Capital firm starts with $20 million as an initial investment fund.  In its early months of existence, it invests $5 million each in four companies.  It receives a management fee of two percent (2%) of the fund value, paid quarterly.  It pays salaries to its partners and other employees, and office expenses, from the management fee.

The investments show up in the Cash Flow table as the purchase of long-term assets, which also puts them into the balance sheet as long-term assets.  You can see them in this sample plan, in the first few months.

In the third year, one of the target companies fails, so $5 million is written off as failure.  You’ll see how that looks as a $5 million sale of long-term assets in the cash flow, and a balancing entry of $5 million in costs of sales in the profit and loss, making for a loss and write-off that year.  The result is a tax loss, and the balance of investments goes to $15 million.

In the fifth year, one of the target companies is transacted at $50 million.  You’ll see in the sample how that shows up as a $45 million equity appreciation in the sales forecast, plus a $5 million sale of long-term assets in the cash flow.  At that point there’s been a $45 million profit, and the balance of long-term assets goes down to $10 million.

This is a simplified example.  The business model holds long-term assets and waits for them to appreciate.  It doesn’t show appreciation of assets until they are finally sold, and it doesn’t show write-down of assets until they fail.  Sales and cost of sales are the appreciation and write-down of assets, plus the management fees.

The explanation above has been broken down and copied into key topics in the outline that are linked to corresponding tables.  These topics are:

• 2.2     Start-up Summary
• 5.5.1  Sales Forecast
• 6.4     Personnel
• 7.4     Projected Profit and Loss
• 7.5     Projected Cash Flow
• 7.6     Projected Balance Sheet

Company Summary company overview ) is an overview of the most important points about your company—your history, management team, location, mission statement and legal structure.">

Content has been omitted from this sample plan topic, and following sub-topics.  This sample plan has an abbreviated plan outline.  With the exception of the Executive Summary, only those topics linked to key tables have been used.

The focus of this sample plan is to show the financials for this type of company.  Brief descriptions can be found in the topics associated with key tables.

2.1 Start-up Summary

This hypothetical Venture Capital firm starts with $20 million as an initial investment fund.  The venture capital partners invest $100,000 as working capital needed to balance the cash flow from quarter to quarter. 

Market Analysis Summary how to do a market analysis for your business plan.">

Strategy and implementation summary, sales forecast forecast sales .">.

Management Summary management summary will include information about who's on your team and why they're the right people for the job, as well as your future hiring plans.">

7.1 personnel plan.

This hypothetical company pays salaries to its partners and other employees, and office expenses, from the management fee of two percent (2%).

Financial Plan investor-ready personnel plan .">

8.1 projected profit and loss.

Please note that in the third year one investment is written off as a failure, producing a $5 million cost which ends up showing a loss for the year of nearly $5 million.  The sale of equity at the end of the period enters the sales forecast and the profit and loss statement as a $45 million gain. 

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8.2 Projected Cash Flow

The Cash Flow shows four $5 million investments made in the first few months of the plan. 

In the third year, one of the target companies fails, so $5 million is written off as failure.  You’ll see that shows as a $5 million sale of long-term assets in the cash flow, and a balancing entry of $5 million in costs of sales in the profit and loss, making for a loss and write-off that year.  The result is a tax loss, and the balance of investments goes to $15 Million.

In the fifth year, another investment is transacted at $50 million.  This shows up as a $5 million equity appreciation in the Sales Forecast, plus a $5 million sale of long-term assets in the Cash Flow.  At that point there’s been a $45 million profit and the balance of long-term assets goes down to $10 million. 

The partners invest an additional $100,000 in the fourth year as additional working capital to balance the cash flow of the company. 

8.3 Projected Balance Sheet

You can see in the balance sheet how the ending balances for long-term assets were not re-valued.  They remain at the original purchase price until they are sold, or written off as a complete loss.  There is a $5 million write-off in the third year, and a sale of $5 million worth of assets in the last year.  That sale of $5 million in assets produces the $5 million sale at book value plus the $45 million gain in the sales forecast and profit and loss table.

8.4 Business Ratios

The Standard Industry Code (SIC) for this type of business is 7389, Business Services.  The Industry Data is provided in the final column of the Ratios table. 

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7 Steps to Form an LLC

1. check what requirements your state has, 2. name your business, 3. pick a registered agent, 4. file your articles of organization, 5. create an operating agreement, 6. plan for the future, 7. consider using a professional, 7 steps to start an llc for your small business.

Affiliate links for the products on this page are from partners that compensate us and terms apply to offers listed (see our advertiser disclosure with our list of partners for more details). However, our opinions are our own. See how we rate products and services to help you make smart decisions with your money.

• The exact steps for forming an LLC vary by state, but it's a similar process in most states.
• You'll need a business name, a registered agent, articles of organization, and an operating agreement in certain states.
• Save $25 when using Block Advisors to form your LLC today. Discount applied in cart.

If you're working on setting up your own business, there's a good chance you're looking to open a limited liability company, or LLC. This business structure gives you limited liability protection similar to a corporation, plus the flexibility of a sole proprietorship or partnership, making it a popular choice for small business owners.

The main perk of an LLC is that it generally can protect your personal assets (like the money you're saving up to buy a home or retire) from certain liabilities or debt that come with owning your business. In other words, in many cases, a creditor you owe money to through your business usually won't be able to come for the money in your personal accounts. Having an LLC can also legitimize your business, which may be a benefit to many small business owners.

If that sounds good, follow these steps to open your LLC.

• Check what requirements your state has
• Name your business
• Pick a registered agent
• File your articles of organization
• Create an operating agreement
• Plan for the future
• Consider a professional service 

LLCs are regulated by states, which means that you'll have to meet the specific requirements outlined by the state where you're registering the LLC. You'll find this information easily on your Secretary of State's website.

While most steps necessary to establish an LLC will need to be done no matter which state you live in, the specific guidance for how to do each step — like naming your business and picking a registered agent — can vary.

Now that you have a business, it's time to choose a name for it. While you'll want something catchy and easy to market, it's also important to make sure that the name you choose meets your specific state's requirements.

First, you'll need to ensure that the name you choose isn't being used by another LLC in your state. You can typically do a name search on the Secretary of State's website ( here's Illinois' search tool , for example).

In general, you'll need to have certain words in the name that make it clear your business is an LLC, such as "Limited Liability Company," "LLC," or "L.L.C." Many states will also prohibit you from including certain words in the name. In New York, for instance, you can't include the words "academy," "bank," "finance," "union" and many more .

Every LLC has to have a registered agent who acts as the point person for any legal matters that may come up and for the Secretary of State to send any official paperwork to. Generally, that person (or business) must have a physical address in the state where your LLC is registered and be available to receive mail there during working hours. They also have to be at least 18 years old.

You can name yourself as the registered agent, but it may not be the best idea. If you're worried you might not be available to serve as the point person or might not be able to keep up with important mail, it might be best to outsource this role. There are registered agent services you can use, though they'll come at a cost.

Next, head back to the Secretary of State's website to find the articles of organization that you'll need to file. You can also meet with someone in the department in person or by phone if you prefer.

The exact information you'll have to fill out for the articles of organization will vary by state. Still, you can expect to be asked for basic information like your LLC's name, address, services, and how you expect it to be managed. You'll also need to pay a filing fee.

Keep in mind that the articles of an organization may be called something different, depending on the state. Alabama and Texas, for example, call it a "certificate of formation." Some states also have publication requirements, which means you need to publish an announcement of your new business in a newspaper.

While you'll likely divvy up responsibilities for anyone in your business on your own, you may also be required to do so via an operating agreement. These agreements outline how your business will be run and delegate roles and power to different members. That may include voting procedures, rules around daily operations, and ownership rights within the company.

Only some states require you to create this type of agreement, but it is a good idea to do so even if you don't technically have to.

Opening an LLC may be your first priority, but there are other tasks to take care of during the process, like getting your employer identification number (EIN). An EIN is an identifying number that the IRS will use for tax reasons, but it's not always required for opening an LLC.

You may also want to open a business bank account to ensure you keep your personal and business assets separate for bookkeeping and tax purposes. Plus, look into what exactly you need to keep your LLC active in your state, which may include filing an annual report.

A lot goes into opening and operating your own business, but you don't have to take care of everything on your own. Block Advisors , part of H&R Block, can help you decide which type of business structure is best for you, such as an LLC, and help you open that business. Using an online service to incorporate your business will help ensure that you submit all of the necessary paperwork required in your state of incorporation. This could save you time now and headaches later.

With Block Advisors, you're not on your own once your business is up and running. The service provides tax help, including filing your taxes with a professional or on your own with help from a live expert. You can also opt for one of its bookkeeping services , which range from a step-by-step guide to doing your own bookkeeping to working with your own dedicated accountant.

If you're looking to scale, Block Advisors also offers payroll services, which help you pay your employees each pay cycle and can make sure you stay compliant. There are three tiers to choose from — the basic service comes with a dedicated accountant, up to the premium service, which includes timekeeping, human resources assistance, and more.

*This article is for informational purposes only and should not be construed as legal advice. You may want to seek the advice of an attorney to evaluate all relevant considerations in forming a business entity. 

**Block Advisors discount may not be combined with any other offer or promotion. Void if transferred and where prohibited. Discount will appear in your cart automatically when you use the link. No cash value. Expires June 30, 2024.

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Meta is spending around $40 billion on AI services and Mark Zuckerberg has a plan to earn it all back

Meta's massive $40 billion investment in ai services is part of a grand plan by ceo mark zuckerberg. despite costs exceeding initial estimates, zuckerberg is confident that the investment will pay off..

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During a call with analysts, Zuckerberg expressed his optimism about the potential of AI development, stating, "We've shown that we can build leading models and be the leading AI company in the world. And that opens up a lot of additional opportunities beyond just the most obvious ones for us," according to Business Insider.

Meta's Plan for Business Messaging with AI

Ads in ai interactions, charging for access to larger ai models.

A third avenue for AI monetisation is selling access to AI models as they grow larger and more complex. Currently, Meta offers access to its large language models, such as Llama 3, for free to users and companies below a certain size threshold. In the future, Meta may charge for access to larger models and more computing power, potentially deviating from its current open-source approach.