3 Steps to Figure Out How Much Money You Need to Start a Business
How much money will you need to start a business? It’s the million-dollar question that every entrepreneur must answer.
Knowing how much money you need to start your business is critical, especially if you’re looking to raise money from investors or get a loan from a bank.
If you overshoot and ask for too much, you not only risk rejection, but you also risk paying interest on money that you’re not spending. Ask for too little, and you risk running out of money before you’ve really given your new business a fair shot to get fully up and running.
There is unfortunately no single solution or even a specific dollar amount for individual industries. Every business is unique and costs are different depending on location — but fortunately, it’s not too difficult to calculate your startup costs.
Here are the three steps you should follow to help you figure out how much money you need to start a business.
1. Create a business plan
Having an idea for a business is just the start of your business journey. To make it a reality, you need a detailed business plan.
Your business plan will help you define your business strategy which will inform your spending plan.
For example, if you’re starting a food truck, you’ll need to think about the kind of food truck you need. Do you need just a trailer that will stay parked in one location most of the time? Do you need a full-blown truck? What size? What kind of branding do you need? What equipment will you need?
Your business plan will help you think through everything you need to get your business started and help you think about the types of expenses that you’ll have as you get started.
If you need help with your business plan, check out our step-by-step guide.
2. Create a detailed financial forecast
With a business plan in place, you can start crunching some numbers.
You’ll want to think about and plan for the following two categories of spending.
Startup expenses and asset purchases
Startup expenses include money that you’re going to spend on things like permits, business licenses, website design, improvements to your storefront, etc.
Assets are for tangible things that you need to purchase. For example, you may need to purchase inventory, computers, office equipment, vehicles, kitchen equipment, and other physical assets. A good way to differentiate an asset from an expense is to think about assets as something you could sell.
Ongoing expenses after you get up and running
Finally, you’ll need to plan for ongoing expenses and forecast those for at least the first 2 years of business. Ongoing expenses will include rent, payroll, taxes, insurance, utilities, and marketing costs. Of course, you may have other ongoing expenses as well.
With all of your spending planned, you’ll want to look at the total spending prior to getting your doors open, before you collect your first payment from a customer.
Then, you’ll want to look at what it costs your business to keep its doors open while sales ramp-up to cover those ongoing expenses.
Initial plus ongoing expenses provide a clear picture
Combine those two numbers and you’ll have a good estimate of how much money you’ll need to start your business.
A helpful tool in all of this is a cash flow forecast. You can use spreadsheets to generate your forecast, or you can use software like LivePlan to streamline the process. The idea here is to get a complete financial picture of your business and how much money is moving into and out of your business.
You can then add money to your financial forecast – loans, savings, and investment – to see how much is needed to keep you afloat while your business ramps up.
In the end, you’ll not only see how much money you need to start your business, but you’ll also see how long it will take to break even on your investment and start turning a profit.
3. Plan for the worst
Just because your cash flow forecast says you need $50,000 in startup funding doesn’t mean that’s all you’ll ever need. You should still plan for the worst.
To be on the safe side, it makes sense to secure 130% of the amount your forecast predicts—an extra third or so of your expected need, to provide a cushion.
After all, starting a business never goes exactly to plan. Things typically take longer than expected and cost more than planned. You’ll want to have a bit of a safety net to cover the unexpected.
Knowing the amount of startup cash you’ll need is crucial when you go to a bank or chat with prospective investors. If you’ve followed these steps, you’ve done your homework and should be able to answer any questions that come your way about potential funding.
Original Source: articles.bplans.com
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