Every new business needs some money to start operating. Yours is no exception.
Before venturing into self-employment, you need to conduct adequate investigation to ensure that your proposed business stands a chance to succeed. You need to know how much it will cost you to run your business and how much money you are likely to make. Remember your reason for pursuing a business idea is to make money.
The capital requirements of a new business will vary depending upon several factors. It is important that these factors are carefully analyzed to avoid underestimation of financial resources needed. No one wants surprises along the way, and most especially, you.
Many entrepreneurs, even with good product or service, fail in their business attempts because they underestimated the capital requirements in the beginning, resulting in capital squeeze and forcing owners to close down.
Your initial capital needs will be determined in great part by the type of operation that you are starting. A manufacturing firm will need more funds than service firms. Other needs that need to be considered include location of the enterprise, current and projected economic climate, product/service to be offered, credit policies, etc.
Here are four steps to help you better understand your financial picture:
Step One: List all Possible Expenses
Prepare a list of all cost items, dividing the chart into two sections: the one-time start-up costs and recurring monthly costs.
One start-up costs include fixtures and equipment, decorating and remodeling, installation of fixtures and equipment, deposits with public utilities, starting inventory, licenses and other professional fees, advertising and promotion for opening, and others. Monthly expenses could include salaries and wages (if any), insurance, rent and utilities, advertising, supplies, interest payments for loans, maintenance and others. It is advisable to have your accountant or lawyer assist you in completing your chart to help you in making accurate estimates.
>> RELATED: Cost of Opening a Retail Store
Once capital needs have been determined, the next step is to identify where you can obtain the necessary funds to commence operations. If you have no possible source of funds whatsoever – no savings, no possible loan sources, bad credit history – it is best that you wait awhile and postpone your plans to open a business until your financial situation improves. You need money to make more money – this has been true a hundred years ago as it is right now.
First place to look for your funds is your own pocket. Start by taking a look at your personal finances. How much money do you need and how much money do you have? How much of your own money can you invest in the business? To help you determine the figure, you can set-up a personal balance sheet. List all your assets and their value–cash, savings, checking accounts, securities (bonds, stocks, and mutual funds), car, personal assets, and so forth. Next, list all debts–credit cards, rent, monthly bills, student loans, car loans, and any other loan.
You are in pretty good shape if your assets exceed your liabilities, especially when you need to apply for a bank loan or other business credit. However, if you have more liabilities than assets, you should consider paying off as much debt as possible before plunging into business. Starting a business amidst tight personal financial situation is simply no way to make a go at it. Too many credit card debts or outstanding loans can put a damper on things. Starting a business while you are overwhelmed by debt may force you to make irrational decisions in the hope of making a quick buck or two.
Step Two: Build a cash cushion
Investing in a business idea is a risky proposition. Before putting your entire nest egg into your venture, you need to make sure that you have some cushion to fall back on when things go south. The rule of thumb is to set aside about six months’ worth of living expenses to fall back on during lean times.
If you have a family and you are the breadwinner, you need to at least make sure that you have funds to cover at least a year of their projected expenses. If you are employed, you need to start saving now while reducing debt. Otherwise you will have to figure out how you can make more money from your venture. You can also opt to stay at your current job until your finances are in order. Always plan on everything in a start-up business to take twice as long and cost twice as much as you expect. If a client says “I will pay you in 30 days,” you should plan for having to wait 60 to 90 days until you get your money. Always think through a contingency plan.
Step Three: Prepare a Budget
You will be performing a balancing act between living expenses and start-up costs, so it’s critical that you determine from the onset just how much money you are willing and able to set aside to get your business off the ground. Calculate how much money you need to start your business. Don’t forget to include the cost of your living expenses during the start-up phase! While smart entrepreneurs know that they need to scale down their lifestyles during the start-up plan, don’t assume you can live on bread and water until the business starts to make a profit. Living too harshly can distort your judgment and dampen your spirits.
Remember that you cannot start a business today and expect to realize a huge fat profit the following month. When creating a start-up budget, it should include your initial capitalization plus your basic living expenses until you realistically can expect profits. You need to know if your business needs $15,000 at the start and you expect to reach your break-even point after six months, then your start-up budget should be as much as $30,000 to cover basic living expenses and how much you need to run the business. When calculating how much money you need to earn to cover all living expenses, don’t forget to account for taxes, health insurance, and other additional costs.
>> RELATED: Is Your Business Successful? 3 Indicators of Success
Step Four: Do a break-even analysis
Know when your business will reach break-even point, which is when your gross profits equal your fixed costs. At this point, you’re neither losing nor making money. This is an efficient way to determine how many products you need to sell to stay in business-and just how much you need to invest in it before you make money. Look at your short-term and long-term finances. The former is about 12 months; the latter is between two and five years. You will have to survive the short-term to make it to the long-term. The average business owner makes somewhere around $30,000 to $40,000 a year in salary.
Recommended Books on How Much Money Needed to Start a Business:
- Money to Start a Business: How To Raise All The Money You’ll Ever Need To Start Your Own Business
- How to Get the Financing for Your New Small Business: Innovative Solutions from the Experts Who Do It Every Day
- Get Your Business Funded: Creative Methods for Getting the Money You Need
- Get Financing Now: How to Navigate Through Bankers, Investors, and Alternative Sources for the Capital Your Business Needs
- How to Raise Capital : Techniques and Strategies for Financing and Valuing your Small Business
- Raising Capital: Get the Money You Need to Grow Your Business
- Pros and Cons of Financing a Business
- What is OPM or Other People’s Money?
- Understanding the Kinds of Capital for Your Business
- What Qualifies for a Home Office Tax Deduction?
- How to Raise Money to Finance a Franchise