Business Plan: Use of Funds
Your business plan’s financial section should include a chart showing where you intend to find the necessary funding to launch the business, the amounts from each source, and the specific uses of the capital you will raise. You must account for the use of each dollar of funding within this chart. To be convincing to funders, the uses must be complete, but not padded with unnecessary or inflated costs. The sources must also seem reasonable to readers.
The sources of your funding will depend on the type of business, the size of the investment needed, and the financial return you project. For small businesses needing only tens of thousands of dollars, venture capital funding is generally out of the question, but angel investor funding or bank loans are certainly possible. As the financial return expected increases, investors and lenders with higher tolerance for risk will become more interested.
The sources should generally include partner contributions. If you have no cash to put in, or choose not to, funders will get the idea that you are not “on the hook” in the same way they are, and may be less driven to keep the business afloat and protect their investment. They would like to know that you are in the same boat as them and have made personal financial sacrifices as well as the usual sacrifices of time and energy.
Categories of Uses
The uses of funding will fall into different categories depending on the type of business you are launching. These may include legal and permitting expenses, leasehold improvements on a rented facility, equipment purchases, starting inventory purchases (if you cannot buy inventory on credit at this stage), marketing expenses, cash to cover the shortfall between your early operating revenues and operating expenses, and additional cash reserves. Use a cash flow statement to determine these final two categories, as only by looking at how the inflows and outflows will work over your first months or year will you be able to see what cash requirements the business will have to keep a healthy reserve in the bank to prepare for any contingencies.
by Eric Powers