Surviving until my business is off the ground

When you are starting a business you need to carefully consider your personal finances and your business finances as they will be closely linked.

You will need to make a realistic forecast of your personal financial needs and whether you will be able to earn enough from the business to sustain that. A personal budget is a plan detailing the personal living expenses you will need to fund from the business or other sources. It should set limits to the amount you plan to spend each month on items like rent, food and housekeeping.

Tracking your personal spending can help you find out how much money you will need to take from the business.

Some expenses, such as your rent or mortgage, are likely to be fixed, whilst your spending on other items may change from month to month. You need to keep a close eye on the areas where savings can be made - such as leisure or travel. The first year in business is vital, so you may have to accept that a financial sacrifice is required to keep on trading.

You can now work out how much money you will need each month. If you multiply the monthly figure by 12, and make adjustments to cover one-off spending such as car tax, household repairs or holidays, you will know how much you need to live on during your first year of trading.

It is important to be realistic. You may need to find other funds, borrow money or contact Jobcentre Plus to see whether you qualify for tax credits or benefits. Financial advisers usually say that the equivalent of three months money should be held on deposit for a rainy day.

You may be able to reduce the amount of money you pay out each month, simply by shopping around for services and loans. If you already have personal debts, for example on credit cards or personal loans, seek advice from an independent adviser or your bank. It may be possible to reduce your outgoings this way as well.

Some utility companies offer deals when you change to a new supplier. Look carefully at exactly what is being offered. For example, you may find that you can make savings if you receive both your gas and electricity from a single supplier.

You can try to reduce your everyday expenses. For example, you could sell your car and buy one that is cheaper to run or use public transport. You could also choose not to update personal equipment such as your laptop or mobile phone until it is absolutely necessary.

You could implement simple cost control systems across your whole business to identify scope for savings. You could cut unnecessary or excessive costs, for example, by not heating your premises at night or finding low price suppliers for goods or services. Adopting 'green' practices such as switching off computers when not in use can also save money and reduce your carbon footprint. Consider leasing goods or buying them second hand. Consider whether you can save money by running your business from home.

There are a number of options to finance your needs during the early days of your business. You could:

• Use savings - make sure that you have an emergency rainy-day fund which should add up to three months spending.
• Start up a business while retaining your existing employment, using your spare time to run your business.
• Release equity from an existing asset - for example, trading in your car for a cheaper one.
• Sell unwanted assets to create income. Things you do not use or want can be sold at auctions, online, or private sales.
• Get a loan from your family and friends. People who borrow from family or friends usually do not pay as much interest on such loans. However, be aware of ill feeling that may be caused if you are unable to repay on time.
• Look for finance from a low-cost fund managed by a local council or community organisation.
• Borrow against future income by selling debts owed to you to a third party
• Get an overdraft or loan from your bank. Remember that the overdraft or loan will have to be repaid, and the interest rate may be high.
• Use leasing or hire purchase to fund fixed assets such as vehicles or equipment.
• Look for investment from external sources in return for a share in your business.
• Take on a second or part-time job. This will provide a useful source of income but it is important that it does not distract you from running your business, and watch out for tax implications if you move into a higher band, which may mean you won't earn as much extra as you expect.

Identify how much money your business is likely to bring in over the coming year and how much profit you hope to make.

Do this by:

• estimating your total income from sales
• estimating your expenses
• working out a figure for salaries and dividends, including tax
• working out the difference between your financial requirements and the amount you are prepared to take out of the business

This will leave you with the amount you potentially need to find from other sources.

Profit and cashflow

It may not be easy to calculate exactly how much your business will make in its first year. It is important to concentrate on managing cashflow rather than profit.

Profit is the difference between the total amount your business earns and the costs it must pay out over the trading period - usually a year.

Cashflow is the balance of all the money flowing into, and out of, your business. It covers actual payments of money, as opposed to what is owed by your debtors or to your creditors. Cash pays the bills and allows trading to continue.

The main outflows of cash are:

• wages and salaries
• overheads such as rent and rates
• capital spending on plant and equipment
• working capital such as stock and raw materials

If you sell on credit, your cash inflow is delayed until you are actually paid. A business that buys on credit and is paid in cash, such as a retailer, is at a great advantage in cashflow terms. Businesses which make sales over the internet can also be cash positive.

Many businesses rely on bank overdrafts and quickly reach their borrowing limits. Think carefully about your cashflow and reduce the need to rely on an overdraft.

Gather together all your key financial information such as estimates, overheads and expenses to produce a financial plan.

The first step is to draw up a budget, which is a plan for spending and saving your money.

You should:

• prepare budgets showing the level of sales and profits you expect to achieve, and the costs involved in doing so
• estimate your total sales
• prepare monthly or weekly cashflow forecasts (which should be regularly updated), looking ahead one year. Overheads such as rent can be accurately predicted
• make sure you will have enough money on the day to cover each payment

It is important you stick to your budget so you don't risk overspending or running out of money for essentials. The key to budgeting is maintaining simple but good records. You will need to keep track of where your money comes from and where it goes.

Read our guide on help and support available for your start up.