In addition to the start-up costs and investments, you need to calculate ongoing costs as part of the financing of the start-up phase. Because often running costs can only be covered by sales after a few months. The company phase, which is not yet profitable, must be financed accordingly. You can use the Profit and Loss Statement plan to determine how much capital requirements are.
In a solid liquidity plan, you also take into account the financing of possible bottlenecks.
Important in the first financial year: running costs & liquidity
One of the main reasons why almost one-fifth of start-ups fail in the first financial year is funding gaps. Although start-ups often calculate the start-up costs and investments very precisely, they then underestimate ongoing costs – which are reflected in fixed and variable costs on the one hand, and overestimate the development of sales on the other.
In addition to the funding gap, failure to calculate ongoing costs and liquidity bottlenecks are another reason why a number of start-ups have to give up early. Since sales does not mean an account credit (e.g. customers are granted long payment periods), you have to be particularly careful here.
In order to ensure that the financing gap and liquidity bottlenecks do not also lead to an early exit for you, we advise you to prepare a profit and loss account (plan profit and loss) as well as a liquidity plan. You can then add the additional capital requirements resulting from both to the start-up costs and investment and thus receive the complete capital requirement for your start-up.
Plan Profit and Loss Account: Profitable from the beginning?
In the first few months it is usually difficult to make a profit, as your offer is not yet known. That’s why you usually need to invest a little more in advertising. The corresponding monthly losses incurred by high running costs after your foundation must be financed. You use the plan to calculate how high these are, using the profit and loss account plan. In this, you plan your monthly sales and running costs.
How to fix a liquidity bottleneck
Since most start-ups tend to set running costs too low and sales are too optimistic, try to use the market-standard key figures (see industry letter, etc.) in terms of ongoing costs in your plan. to get one’s bearings. In terms of sales, we advise you to look at the sales figures – ideally of the last few years – of comparable competitors – in terms of size, employees, etc.
For your business plan, first create a “normal” plan profit and loss statement (i.e. if everything is going as you would like it to be). After that, you should also create a “pessimistic” plan profit and loss account, which shows you the maximum capital requirement if your project does not develop according to your wishes.
Calculate Break Even and Financing Gap
In the Income statement plan, you compare running costs with monthly sales, as described above. You can then read out the so-called break even point as well as a funding gap from a completed plan profit and loss account.
The Break Even is the time when current costs are covered by monthly sales – the Break Even is therefore an important Milestone. For investors, the moment when the break even is reached is especially important – e.g. “from the 7th month we write profits”.
For the calculation of capital requirements, on the other hand, the financing gap in the profit and loss account plan is particularly relevant. The funding gap is the maximum value of the monthly accrued losses (turnover minus running costs per month). In our financial plan tool, the financing gap in the profit and loss account plan is automatically calculated and added to the capital requirement.
Don’t forget your entrepreneur’s wage!
When you calculate ongoing costs, remember they are not only the cost of rent, material or personnel, but also your private expenses. After all, since you are self-employed from now on, you must be able to pay your private expenses with your entrepreneur’s wage. Depending on the company form, the entrepreneur’s salary is recorded, for example, in the case of a limited liability company as an operating expense directly under running costs. This is not provided for in the case of a partnership. In this case, you should add the entrepreneur’s wage as running costs.
Regardless of the form of company, however, you should be aware of how much you spend on housing, food, clothing, etc. per month before starting a business. With a detailed list, you can not only determine how much your start-up has to pay at least per month to cover your private costs, but you can also identify potential savings.
Liquidity plan: Turnover – Cash receipt
Even if you found in the profit and loss account plan that you are making profits right from the start because the revenues cover running costs, this does not necessarily mean that you do not need additional capital requirements.
Because what many start-ups forget is that a sent invoice directly increases the turnover, but the effective receipt of money into the account usually takes place much later.
In order to identify possible liquidity bottlenecks, you should therefore definitely create a liquidity plan. If you have created a liquidity plan, it is relatively easy to see whether you are using additional financing, e.g. the current account loan in the event of a liquidity bottleneck.
Optimization potential in the liquidity plan
There are a number of ways you can optimize your liquidity plan. Check your liquidity plan for the following measures:
- Interesting forms of financing: A form of financing that is gentle on the liquidity plan is, for example, leasing
- Discount: When you grant customers a discount, you can usually significantly improve the payment morale of customers – this has a positive effect on your liquidity plan
- Agreeing longer payment periods: Payments to suppliers usually make a key point in the liquidity plan. Especially at the beginning, it is important that you agree on as long payment periods as possible. Talk to your suppliers, your liquidity plan will thank you!
- Employee participation: Another big point in the liquidity plan is usually salaries. For example, you can consider whether you are participating in the company, but whether you are offering a lower wage. Or you can agree on a lower fixed salary than usual on the market, but a higher variable remuneration. You have to think carefully about both measures, but they reduce the costs that are running at least at the beginning and thus have a positive effect on the liquidity plan!
The goal is…
… that you present a realistic plan profit and loss account in your business plan, i.e. comprehensible ongoing costs and conservative revenue estimates that show potential funding gaps. Ideally, your business plan includes two plan profit and loss scenarios (normal & pessimistic variant) from which the reader can read out the resulting maximum capital requirement.
In addition to a potential funding gap, you need to check your business model for potential liquidity bottlenecks. You do this by creating a liquidity plan.
If you have prepared a profit and loss account plan, prepared the liquidity plan and determined the additional capital requirements due to a financing gap and/or a liquidity bottleneck, you can use the entire amount of capital needed for your business start-up required capital needs.
