Q&A - What are the financial objectives of a new business?
This note outlines the main financial objectives that are set by an entrepreneur.
Most business start-ups begin with one main financial objective – to survive.
Why survival? Because a large percentage of new businesses do not survive much beyond their launch. The entrepreneur discovers that the business idea is not viable – the business cannot be run profitably or it runs out of cash. Start-ups have a high failure rate.
Survival is about the business living within its means. To survive, the business needs to have enough cash to pay the debts of the business as they arise – suppliers, wages, rent, raw materials and so on. To survive, a business needs to have:
• Sufficient sources of finance (e.g. cash, a bank overdraft, share capital)
• A viable business model – i.e. one which can make a profit
If survival can be assured, then profit is the next most important financial objective for a new business. A profit is earned when the revenue of the business exceeds the total costs. The entrepreneur can choose to reinvest (aka “retain”) the profit in the business, or take it out as a personal payment or dividend.
For many small business owners, profit is the return for all the hard work and risk taken. Profit is the reward for taking a risk and making an investment. Ideally, the profit earned is sufficient to provide the entrepreneur with enough income to live. In many cases it will be more than sufficient, once the business has been trading successfully for a few years
However, it is important to appreciate that, to make a sustainable profit, a new business needs to be able to:
• Add value
• Sell into a large enough market
Another financial objective is personal wealth. Some entrepreneurs have an objective that goes beyond wanting to earn an adequate income. They aim to build a valuable business that can substantially increase their personal wealth.
To illustrate the potential financial rewards, here are a couple of examples:
Karen Darby sold her business SimplySwitch, a service allowing consumers to compare rates for gas and electricity suppliers among other things, to the Daily Mail for £22 million.
Linda Bennett, one of Britain’s most successful female entrepreneurs, sold her women’s fashion chain, LK Bennett, to two venture capitalists for £70 million.
Relatively few entrepreneurs go on to achieve the kind of personal wealth enjoyed by Karen Darby and Linda Bennett, although many may have aspirations for such riches when they first start-out!