Calculating The Startup Capital Requirements for Your New Business …
Your idea for a new business is sound, you’ve researched it and prepared a draft business plan. Now you need to draw up a budget to show your startup capital requirements.
This is an essential part of getting your business management up and running and should not be skipped.
Without a firm idea of the startup capital you require you are setting yourself up to fail.
How much startup capital do you need?This is the question that all potential business owners need to ask themselves before finally deciding on their business model.
At start-up all businesses require enough capital on hand to carry the business until it turns its first profit.
Many potentially profitable businesses do not make it to profit, simply because their owners did not have enough cash on hand to do this. What a waste.
Getting your startup capital requirements right is a must and is not difficult.All you really need to do is put together a reasonable assumption of all your startup capital costs.
One important thing to remember is that at startup you need to have provided for TWO different startup capital requirements.
- The first requirement is cash for your one time costs. Items that will allow you to open your door.
- The second is the money that you need to cover your monthly outgoings and running costs, until you break even.
Using your draft business plan as the basis of your startup capital budget, you will have a good idea of what you need to get started.
You now have to put a cost to your needs and the cash you require will very much depend on your type of business, but here are the major expenses you can expect to have to cover ….
Initial Startup Expenses …Consider are you going to rent or build? If renting you will have to put down a deposit plus at least the first months rent. If building you need to know the costs.
- If renting, are you going to have any remodeling or redecorating costs?
- Signage costs must be taken into account
- Office furniture and fittings are always required so budget for the minimum.
- If you are leasing office machinery, telephones or vehicles, again budget for these.
- Office stationery and cleaning supplies.
- Insurance costs, including building and contents insurance and employee liability insurance
- What licenses and permits need to be obtained and how much will they cost?
- All your other professional service needs that require payment before startup such as attorney and accounting must be taken into account
What inventory will you need at hand for startup?Be careful here, the amount will very depending on the business. Re-supply times will generally allow you to judge how much inventory you will need.
- Will you need any manufacturing equipment and tools? Build these costs into your capital requirements.
- If you are going to advertise and promote your opening, budget the maximum possible cost.
- Any cash needed for floats, etc.
- All the other pre-startup expenses that you can think of and which relate to your business.
Finally, it is an unwritten law that despite all your careful planning and budgeting, you will need more startup capital than you think, so allocate an additional percentage to cover the unexpected.
Now lets move on to your monthly running expense requirements.
Ongoing Expenses and Your Startup CapitalUntil you break even, you will not generate sufficient cash to cover your monthly expenses and you have to make provision to have this cash available. Before you can do that you will have to put together your budget as follows …
- Rent or mortgage repayment
- Loan payments
- Any inventory replacement not covered by cash sales
- Advertising expenses
- Labor expenses, including taxes
- Lease and interest payments
- Bank charges
- Credit card payments and charges
- Monthly insurance
- Office and other expenses
- Repairs and maintenance
- Telephones, light and water costs
- Suppliers bills.
- Sales taxes.
- Professional fees.
- Transport and delivery costs.
- Management and your salary.
NOTE: How many months you budget for your ongoing monthly expenses will depend on your type of business.
- If you estimate that your business should reach break-even and then start showing a profit after say three months, budget for three months startup capital requirement at least.
- If it is going to take a year before you start showing a profit, then you will need to plan on having a years cash available to cover your startup capital expenses.
Think optimistically, but plan conservatively.
When compiling your budget try and look at your cost figures as a base line budget.
- If the business turns out to be better than expected, you will exceed your budgeted profit figure, which is the upside and is something to aim for.
- On the other hand, if you can’t meet your budgeted figures, you need to have a downside plan available, your Plan B.
When you put your budget together you will have a good idea of your startup capital funding needs.
Then you can decide whether to put together the cash required from your own resources, borrow it or change the plan.
If you decide that the whole idea is just too much for you, you can downsize, choose a more realistic business option or give up the idea completely.
Spend quality time on your budget and once completed don’t change it.
This is the base line of your business and should be used to measure your actual performance during the first year.
If there are dramatic changes in your circumstances, you can amend your budget figures in a budget forecast, but don?t change your original budget.
Once you are generating profit, your small business finances will change somewhat and you will no longer need your startup capital budget as, by then, you will be using an annual financial budget.iDex7 Web Design