Of the millions of businesses that launch every year, an overwhelming number barely get off the ground. Others gradually fizzle out and close shop after just a few years. Usually, it’s not just one factor that leads to their demise but a combination of missteps and poor decisions. One of the most common reasons is not considering the numbers that matter most and using that information to create a robust and successful business.
Numbers help you monitor and intimately understand your business. They reduce the uncertainty of business operations by providing an accurate estimate of how well a company will perform in specific environments given a particular set of variables. That’s why getting the correct numbers and mastering the art of reading them is crucial. Here are some of the numbers that play a significant role in the success and longevity of your business.
1. Seed Capital
This is the initial funding required to start a new venture. These are also the funds that are going to launch the business and help it meet its short-term obligations before it starts generating revenue. Ideally, you need to raise an amount that’ll help you attain profitability, so you never have to raise funds again. Consider your business plan, your competitive positioning, as well as the various risk and profitability factors in landing on an appropriate figure.
2. Projection
This represents an estimate of a business’s future expenses, revenues, and profits, usually for one fiscal year. If your company is just getting off the ground, you need short-term financial projections on a month-by-month basis to track your progress. Factors considered while calculating projections include administrative costs, employee wages, taxes, office rent, maintenance, cost of materials, and a host of other external market factors. It’s vital to be as realistic as possible when creating financial projections, as this data will influence other business decisions you undertake down the line.
3. Debt
Most businesses often use debt in their capital structure because it offers some advantages over equity financing. Compared to equity, debt is finite. You’re only obligated to make the stipulated interest payments and give back the debt principal in the agreed time frame, and your debt is fully settled. Equity, however, can be infinite. Once you sell off a stake of your company, you may end up forking over a portion of the profits forever.
Before opting for debt financing, consider the available interest rates and the borrowing requirements. It’s also advisable to split up and spread out your debt among various sources to minimize the control a single lender can exercise over your business.
4. Insurance
Business insurance is the financial coverage offered to a business in monetary compensation for an event that might happen. One catastrophic event such as a fire, earthquake, or just one lawsuit could result in huge losses that could effectively wipe out your business before it establishes its roots. With the right insurance, however, such incidents can only result in minor setbacks. In evaluating risks to your business it’s important to look beyond the risk to physical resources like buildings and vehicles and consider the risk of losing human resources like key people. Most entrepreneurs obtain insurance on the fleet while forgetting the risk of losing their key people.
Start by understanding your industry’s risks and the relevant legal policies that are available. It’s also essential to have an accurate estimate of the insurance amount you’re supposed to pay before subscribing to any policy to avoid over-payment. For this, you need first to determine your business’ valuation. Also, keep in mind that as your business grows, you’ll be required to re-evaluate your business consistently and update your insurance accordingly.