If you’re thinking about starting a business, it’s critically important being able to answer this question.
Get it wrong, and you may end up running out of cash before your business even has a chance to take off.
So how much startup capital do you actually need?
Enough to just get your business to grand opening day?
Factors determining how much you need to start a business
One Time or Upfront Spends
What are all the one time spends you need to make at the beginning? A lot of people think this alone makes up the startup costs. Depending on the type of company you’re starting up, this could include purchases of equipment, licenses, buildings, raw materials, etc…
Many new business owners make the mistake of only including this category of spends and setting aside just enough money to get them to grand opening day.
What do you plan to do for your launch? Getting early traction might require significant marketing spends early on. Will you have a big grand opening? And extended soft launch? A coordinated online and offline marketing campaign?
Think about your first 6-12 months in business and determine all of the extra spends you need to support a successful launch.
Working Capital Spends
Remember, your business won’t be running at 100% on day 1. It takes time. And until it gets there, you still have expenses. During the period before you break even and operating at a loss, you will be burning cash while you grow your business to a sustainable level. Who do you need to be paying? Maybe yourself and your partners to cover living expenses. Maybe early hires or even contractors.
Until your business breaks even and starts making more than it spends, which could take months or sometimes years, you will need to make sure you have enough reserve cash to pay all the bills. This can include things like rent, labor, insurance, utilities, and other recurring expenses that you pay regardless of how your sales are doing.
As much as you’d like to be able to plan for everything, you can’t. Unexpected things will happen. Something will break. Or get stolen. You’ll need more of this or that. So whatever you calculate for everything else, make sure to add contingency funds to your startup cost calculations.
Experienced entrepreneurs will always add a contingency amount of extra money available for emergencies and surprises. And you should do the same.
But this is just one of many questions you’ll need to tackle when you start a business.
You might not be sure what business model or pricing would work best. Or how headcount and corresponding labor costs might look like if you grow more rapidly than planned.
One of the best and cheapest ways to test these scenarios is by building a robust financial model for your new business. So you can test out different business and pricing models, determine the key drivers of growth, understand your runway and time to breakeven, the relationship between traffic, conversions, and sales, and of course, how much capital do you really need to start with?
But there is a right way and a wrong way to go about it.
If you’re interested in learning how to build robust financial models for your startup business, join over 43,000 fellow students in my Financial Modeling for Startups & Small Business course, complete with fully built financial models for seven completely different types of businesses.
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