Business Income and Expenses: What to Consider
If something is usually sinned when starting a business project, it is optimism; Entrepreneurs are a species whose natural reaction is to overstate income and understate expenses when starting out. Both decisions are wrong and can cost you dearly.
For those who feel identified and want to strengthen their finance, We prepared this post with the intention that the accounts look healthy and fresh, you can do the revenue and expense forecasts from a company and, thus, the first year of the company and all the efforts put into it are not in vain.
You might also like: Master in Financial Management
10 financial keys for your business
Dump
Steps to identify a business’s income and expenses
Start by taking precautionary measures
“When I sell this milk, I will buy a basket of eggs and with it I will have chicks; when the chicks are big I will sell them at the market and I can buy a little pig, I will feed it and that way when I sell it I will have enough to buy a calf (…) That’s how the milkmaid was playing with her pitcher on her head when she tripped and lost all the milk she thought she was selling”.
The story of the milkmaid may be a well-worn resource, however, it perfectly illustrates a situation that any entrepreneur will find themselves in.
The best way to control the financial situation of the first year of activity is to do the accounts in a realistic and forward-looking way. Let’s start!
Master in Financial Management and Management Control
A sound financial foundation helps build the foundations of a business
I want to know more!
- Do a preliminary study of the market: the better you know the industry, audience, incidents, competition, etc. You will be better prepared for any unforeseen events and you will have fewer surprises.
- Perform calculations for each step: it involves establishing funding tranches for each stage of the project. For example, if you want to reach a goal in 6 or 12 months, set a specific amount for it. This is intended to reduce economic risk before the launch of the product or service; “waste minimization” philosophy.
- Poses several possible scenarios: It’s about things as basic as not venturing to put a price on the product without relying on the price of the competition. For basic decisions like this, it’s best to place yourself in three scenarios; an optimist, another pessimist and a more realistic (from which we will start). For each of these scenarios, we must have an answer to the problem; in the price example, we should already know which three different prices we would use in each circumstance.
doHow to calculate income from a company ?
In the revenue item, we must apply a realistic as well as ambitious vision; Everything in perspective. Being too careful can cause just as much trouble as going too far and thinking we’re going to sell everything for nothing. When you’re budgeting, you shouldn’t miss; it is better to leave a margin, otherwise the growth of the company can stagnate when it runs out of cash.
To calculate what will be spent in the first year, it will be necessary to take into account, among other things, both the volume of sales and the price of the product or service. Here are some tips to consider:
- Have additional funding for the first year: At this stage, you must think that the income at the beginning will be lower and later. For this reason, it is necessary to finance this period during which you will have to compensate for the lack of income with an additional investment.
- Quantify the total demand for the product: Based on the market research, it is necessary to determine what is the real demand for the product and what is the one we aspire to achieve (taking into account the competition).
When forecasting, we recommend that you assess the following aspects and take them as a guide:
- The target audience: who it is, how much they want to spend, segment it by age, gender, etc.
- The competition: what piece of the pie can you keep and “steal” them, what added value does your business bring.
- Suppliers: Meet the industry leaders and compare their rates. The cost of your suppliers will determine the cost of your product as well as the profit margin.
- The price: Depending on whether the product is new or reproducible, you can play up or down on the price. The most exclusive and inimitable; more expensive.
- Seasonality: all businesses have seasonal peaks and troughs, find out which ones will be yours.
- Profits: Based on what you already have, subtract between the final price of the product and the cost to find out what you will enter. From there you should make a profit, although the first year the margin may be nil or very low.
doHow to calculate expenses?
The expenses item refers to the chart of accounts in which the expenses of the activity are established; necessary to earn an income. In this game, there are occasions when certain expenses are neglected, so we collect the most important ones:
- Tax costs: These are the costs of corporate taxes, VAT, royalties, etc. You can also put costs for property rights, licenses for Softwarelegal requirements, etc.
- Logistics and suppliers: We have mentioned to you before the importance of supplier and supply chain costs. Depending on these costs, the revenue may be higher or lower, as this is part of the process that can make the product much more expensive for the simple fact that it is not dependent on your business. Evaluate all the costs that may arise from this part of the production: delays, complaints, returns, modifications, etc.
- The cost of acquiring customers: includes marketing and communication costs.
- Financing costs: When you depend on external financing, you must add the costs of installments and interest.
- Investments: they are unavoidable. We refer to the costs of acquiring the material to create the product (machines, vehicles, etc.), as well as office rentals, computers, patents, etc.
- Cash and Social Security: your soul friends in this new project. the quotas of the two administrations are the basis of everything, so do not forget them.
- Operating costs: It’s about establishing a geographic ratio in which our business will operate and how much money it will cost to have a presence in that whole area; either with stores, for shipments, etc.
- IT upgrade costs: it is better to depreciate the increase in expenses related to hardware updates or, in general, to the R&D that we give as added value to the product or service over time.
- Own labor cost: The contractor should be counted as an expense, as he invests hours in this project and usually his salary is not included in the position. It is better to do an evolution; Start from a price per hour of 0 or negative, and see how the possibility of increasing this figure evolves. These can give us an indication of the state of “health” of the company.
- Labor cost: the general cost of your employees, during the first year, we recommend that you do it according to the needs of each phase of the project. You won’t need 100 people at once, or people from all themes or fields. For example, starting with a marketing team is better than a human resources team.
- Supply costs: refers to expenses for electricity, water, gasoline, cell phones, etc.
Tips for Calculating Income and Expenses
- To achieve the balance between revenues and costs, halve the benefits and double the costs; so you get closer to reality.
- It is preferable have two accounts: one for the company and one for the VAT, since this money does not belong to you and you must keep it intact.
- Go and correct expenses according to the volume of activity which is being acquired.
- Hire someone with financial knowledge if you don’t have them yourself. There will come a time when you will have no choice but to delegate this task because it will be too complex for you or because you will be wasting lucrative abilities that you are not aware of.
The financial part of a business is the least attractive for entrepreneurs; they like to realize the idea in terms of working on the product or service, its sale, its image, etc. However, accounts are a way to go, the more you know in the beginning; better.
This is why we recommend that those who have no knowledge of finance take a course or read up on the subject beforehand. In IEBS we have the Master in Financial Management. a complete program to meet this challenge in complete safety.
Master in Financial Management and Management Control
A sound financial foundation helps build the foundations of a business
I want to know more!
Source link