What is the finacial strategy to run the new business and how to survive. We are going to start a construction business and it's a new company.
Capital is essential when it comes to opening a new business. It is for this reason that there is a need to have financial plans that help to establish and run the new company. The financial strategies that are employed in new businesses differ and they are dictated by the type of the business. At the same time, the financial plans come in place to guide the organization on how it would access enough finances to run the business.
Financial Plan and Strategies
Different financial strategies will come in handy to make sure that the company is operational and effective. The first strategy will be to minimize the costs. When an organization is still new in the market, it has no enough money to afford everything it needs. It is for this reason that there would be a dire need to minimize the costs. In an organization, the costs might spend most of the capital of the company. When the costs exceed the capital, the organization is in a disadvantageous position, and this might lead to the dissolution of the company. A plan should be put in place, and it should focus on auditing and forecasting. Auditing will make sure that the working environment is used to dictate the percentage that should be dedicated to operations. Forecasting should be used to predict the future business environment thus giving the management a rough idea of how the capital should be currently used.
The second strategy will be associated with the aspect of spending a portion of the capital rather than injecting all the money to the operations of the company. In the first few months of operations, organizations do not make profits. At the same time, not all operations are fundamental to the growth of the company. With this in mind, it is paramount to make sure that only the operations that have a significant effect on the success of the company are drafted and later implemented. Therefore, it is essential for an organization to make sure that there is proper planning of how the capital is spent. Saving a portion of the capital will make sure that the company has enough capital to run its operations for a more extended period.
The third financial strategy will be to have alternative sources of finance. Having only one source of finance can be a challenge. The reason behind it is because if the source of finance collapses, the organization is left in a situation that is challenging. Apart from savings, the company needs to identify different money lending organizations to make sure that in the case the current capital runs out, the company is in an excellent position to borrow money from a reliable source. Sometimes the markets are unpredictable, and when it gets to this point, there is the need for the business to be ready and to plan for future uncertainties. The financial alternatives will make sure that the company has a capital to run on even after the primary source of finance has run out of finances.
Source of Capital
The new business will have its capital from two different sources. The first source will be the savings of the shareholders. It is not wise to entirely depend on the external sources of finance. The shareholders will bring to the table more than 75% of the capital. The second source of the capital will be the bank. A total of $100,000 will be needed for the new company. The company will start small, and therefore there will be no need to have a huge budget. Some of the heavy equipment that will be needed in the initial stages will be outsourced to save the cost. The money that will be borrowed from the bank will be $50,000. Therefore, the company will have a total of $125,000; $25,000 has been raised to make sure that any uncertainty does not affect the operations of the company.
One of the best things about a construction company is that each expense that is channeled to the operations has a return to the company. Out of the $100,000, $25,000 has been allocated to prior operations expenses. These are the expenses that are not associated with the functions of the company and are incurred to stabilize the company. In the construction industry, an operational cost of 1 can lead to a profit of 3 to 4. Therefore, it means that the expenses that will be incurred during operations will compensate the expenses that did not bring profits to the company. Some of the functions that will incur expenses are lease, licenses, labor, and equipment.