Mastering Finance for Entrepreneurs: Insights from Juna Financial Solutions

The COVID-19 pandemic led to a spike in entrepreneurship in the U.S. In 2020, the number of new business applications reached a 15-year high and haven’t slowed down, according to a report from The National Bureau of Economic Research. 

With that trend expected to continue, it’s important that budding entrepreneurs become versed in financial principles. There are several considerations they need to be aware of when starting a business. If you’re already an entrepreneur or looking to become one, we’ve outlined three main areas you should be thinking of when it comes to advancing or kicking off that next big thing.

Creating a Financial Model

First and foremost, entrepreneurs need to determine if their venture is financially feasible. They should develop a detailed financial model (also known as a financial forecast or financial projection). This starts with a projected income statement with assumptions of revenue, costs of goods sold, and any operating expenses. The model should be projected over a time period at least until the venture is estimated to achieve break-even, where there is enough revenue coming in to cover expenses. 

The model should include numerous assumptions that are clear and reasonable. It’s a good idea to create a separate assumptions page that allows for flexibility and can be changed under different growth scenarios. These assumptions are the backbone of your financial model, so you should know them cold.

SCORE, a resource partner of the U.S. Small Business Administration (SBA) with expert small business mentors, has numerous resources, including a free online course on how to create projections and a very useful template for creating financial projections. There, you will find program information and assorted tools for entrepreneurs.

Understanding Cash Flow

Here’s the million-dollar question: How much cash do you need to get your venture off the ground? (If you knew that, you could start your own advisory service.) The first rule of entrepreneurship is to never run out of cash. Never. As in ever, ever. It is critical to have money flowing through your company. After all, you will need to have cash on hand because you can’t pay your employees with stock options.

“It is impossible to know exactly how much a new business will need during its first five years, but it is possible to come up with realistic estimates,” according to a story in Harvard Business Review. 

As the piece notes, those estimates come from the financial model. As an entrepreneur, it’s vital to have a snapshot of your company’s financial health at all times. It’s the only way you can make informed decisions that impact company stability and growth.

“For many businesses, especially new ones, where credit lines are limited and financing is difficult, cash proves to be one of the most critical assets. It serves as the fuel to your company’s engine,” according to a story in Harvard Business School Online’s Business Insights Blog.

In addition to cash flow to pay expenses and capital expenditures, you need “working capital.” “Working capital is money that companies spend paying suppliers and holding inventories while waiting for payments from customers,” according to this story in The Wall Street Journal. Forecasting your working capital needs is essential in your cash flow projections.

To get an estimate of your cash flow needs, the first step is to look at your income statement projections, and then add any capital expenditures (such as computer purchases) and working capital requirements. This should give you an approximation of how much capital you need to raise. 

Raising Capital

All of this brings us to raising capital. And just where do you get capital, anyway? Despite popular belief, venture capital investors are not the “end all, be all” of raising capital. Entrepreneurs get it in any number of areas, including their own personal savings, friends and family, banks and credit unions, the SBA, grants, and angel investors, to name a few. This story in Forbes provides some really helpful guidance as to where you can access various forms of capital.  

As an intrepid entrepreneur, perhaps you tell the investor that you need $1 million. The investor, in not-so-subtle terms, may tell you they, too, need a million bucks. Who doesn’t? So, before you enter into any meeting with a potential investor, be prepared to explain what you plan to do with the money and how you’re going to turn their investment into a win.

For example, if you need $250,000 to get to the first sale, be explicit with the financial breakdown: $100,000 for research and development, $80,000 for capital expenditures (fixed assets), $25,000 for advertising, $25,000 for overhead, and $20,000 for working capital (purchase inventory). Your financial model should show how this will get your company to the next level and provide a return, whether you plan to raise outside capital or not.

Empowering Entrepreneurs with Financial Knowledge

At Juna, we specialize in providing tailored financial solutions for entrepreneurs from diverse industries. Our team of experienced professionals provides guidance on everything from budgeting and forecasting to financial analysis and planning.

Our goal at Juna is to empower entrepreneurs with the financial knowledge they need to succeed. Juna’s services help entrepreneurs make sound financial decisions and drive their businesses forward.