How Much Do I Need To Start My Own Business – A big part of starting your business is figuring out how much cash you’ll need between the time you have expenses and the time sales begin to cover your expenses (and more).
Not having enough money to pay suppliers is a problem, but when you have employees, your concern doubles. A big part of starting your business is figuring out how much cash you’ll need between the time you have expenses and the time sales begin to cover your expenses (and more).
How Much Do I Need To Start My Own Business
The amount of money you need is basically a science, but being too precise is a recipe for failure. You may have heard before that plans in business are best described as assumptions. If you’re going to guess, guess in a way that gives you some flexibility and more money than you think you need. There will be things you didn’t plan for, so going back to lenders early to get more money is a big no-no.
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Next, you’ll want to estimate your sales or cash. In the simplest terms, you need enough cash to get you through when the business becomes “cash flow positive” or sales exceed your current expenses. Let’s tear it down!
Start-up costs can be considered any expense you will incur before you open your doors. For a brick-and-mortar business, that could be store improvements, buying inventory, installing utilities, leasing before you open the doors, and all the details you need, like permits, licenses, and insurance.
Take the time to understand every conceivable expense needed to start your business. However, resist the temptation to be too precise with them. Assign a value to each and continue. Inertia kills plans. we are not trying to be perfect about this as costs will change and you will find out later.
If you build a cash flow forecast in a spreadsheet, all of these costs will go in the “time 0” column. We don’t really care when exactly those costs will be incurred, we just care that we describe them in detail. Create a section in your spreadsheet that lists all of these costs, then enter their estimated value in the Time 0 column.
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Bottom line. Be thorough in listing your startup costs, but don’t get bogged down in determining exact costs. The goal is to maintain momentum, and we’re going to make sure we have more money than we need anyway.
Now you want to create columns for each month for the next year or two. You can create longer projections, but they tend to lose meaning after 1 or 2 years because so much can change in that time. Remember, the purpose of this forecast is to determine how much cash you need to get started, so it shouldn’t be longer than your cash-positive month unless there are major seasonal changes in the business and you suffer cash-negative months every year. .
The next section of your cash flow should be your sales estimates. This is really a shot in the dark and can cause a lot of anxiety. If you don’t have a product or service that’s really in demand, you’ll want to slowly build up these sales. Also, pay attention to expected seasonal cycles within your business.
You’re trying to strike a balance here between realism and optimism – “what if sales were even slower?” You can work through some best, likely, and worst case scenarios later, but don’t worry about it yet. Stick to your best guesses for now.
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Bottom line: Make your best sales estimates, but make sure you do it with cash and not when you make the sale. Stripe may take up to 7 days to reach your bank account. customers can “scratch” your account.
Your operating expenses are all the recurring costs associated with running your business. In the next section of your forecast, you list all the expenses you can think of and assign a value to them. Make a big list of your operating expenses and assign your best estimate of the cost of each. Copy these amounts for each month of your forecast.
Some operating costs will be fixed (remaining the same regardless of sales volume) and others will be tied to your sales. You can create a formula to increase these costs as sales increase as a percentage of revenue.
When you’re approaching people to invest in your business, it’s tempting to just take a small amount from the business as an owner/manager fee. However, you must live. If you’re worried about how you’re going to pay your personal bills, you won’t be fully focused on building your business. Understand that the work you put into building your business deserves compensation and plan for it. We recommend paying (or at least recognizing) the market wage to you as the business owner.
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Bottom line. Again, be detailed with your list, but you don’t have to be exact. Do not forget to make sure that you can live. you need some income to feed and clothe yourself.
Now that you have all of your expenses and sales listed, you’ll want to tally them. Add up your upfront costs and your sales and operating expenses for each month. Create the net cash flow for each period. As of 0, you will have a large cash outflow and may have a net cash outflow every month during the first half. it’s normal
The next step is to create an accumulated cash balance row in your spreadsheet. This is the cash balance you have at the end of any given month. To calculate it, add the previous month’s balance to the current month’s net cash flow. This will give you your closing balance for that month.
The goal of this series is to see the lowest possible cash balance you will have during your startup. This is the (minimum) amount you need to start your business. This is the smallest amount you need to find to start your business. Remember this. negative money means you have no business. you need to find more money.
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Bottom line: The cash you need is the sum of all your net cash outflows until you have positive cash in your operations.
There’s no hard and fast rule about how much extra you’ll need beyond what you’ve decided you need.
No matter how much you study, you will miss things. Sometimes this can be in your favor, but mostly it is an unknown or excess cost. The best thing you can do is expect the unexpected and have extra cash on hand to handle it.
Cash cycles are how money moves through your business. In a simple world you would sell the product, collect the money and pay your supplier all at once, but the real world doesn’t work that way. Often you have to buy raw materials, reimburse people and pay deposits before making a sale, and then your customer doesn’t pay you for 30 days. At the same time, you need a cash reserve (working capital) to finance this lag between cash disbursement and collection.
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The more you grow, the more money you will need to fill this gap. The amount of money required will vary by company and industry, but as a general rule, new small businesses tend to have the worst conditions; it’s a reality you’ll have to deal with.
There will be monthly and seasonal cycles. When applying for an investment, you need to understand your lowest cash balance and create a buffer for the unknown.
We’ve just calculated your monthly cash balances, but if you have a lot of withdrawals in the middle of the month and withdrawals at the end of the month, your cash balances will be less than these amounts throughout the month. It is best to have a buffer for these periods when your cash balance may be less than the lowest expected balance at the end of the month.
Now that you’re armed with the knowledge, it’s really just a matter of getting started. Here is the best cash flow tool we found, brought to you by Futurpreneur. It covers the components that we have discussed in this article and also gives you some interesting reports. You can also grab a copy of our simple Google Sheet shown above.
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