How much money will you need to start a business? It’s the million-dollar question that every entrepreneur must answer. The truth is, there isn’t a simple mathematical formula that will spit out your magical startup number.
Every business is different. From expenses to staff requirements, your business’s needs are unique, and so is the amount of money you’ll need to get it off the ground.
If you overshoot and ask for too much, you not only risk rejection, but you also risk paying interest you could have avoided. Ask for too little, and you risk running out of money before you’ve really given your new business a fair shot.
We’ve built calculators to help you determine how much money you’d need to open your doors, and how much you’d need to sell in order to earn back your operating costs, and even how much cash you’d have on hand, but joining all of those calculations together requires a little more work.
To help you quantify the amount of startup cash you really need to open your doors and operate until your business starts turning a reliable profit, Joe Geiger, a serial entrepreneur who has started and sold 10 businesses, offers these three steps:
1. Create a killer 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.
The business plan is what establishes your goals and sets benchmarks for achieving them. You can think of it as your road map.
Business plans are typically made up of seven parts:
A one- to two-page summary of your entire plan.
An overview of who and what you do.
A list and description of the products and services you offer.
A look at your niche, how you’ll get customers, and the changing trends in your field.
Strategy and implementation summary
An overview of how you’re going to be successful.
An overview of how your business and staff will be managed.
A look at profits and losses and plans to hit goals.
This is step one to figuring out just how much startup cash you’ll need, Geiger says. For more help creating a killer business plan, check out our handy outline.
2. Create a detailed cash flow forecast
With a business plan in place, you can start crunching some numbers.
You’ll want to put together a cash flow forecast. You can use spreadsheets to generate your forecast, or you can use software like ours to streamline the process. The idea here is to get a financial picture of your business.
On a basic level, you’ll enter all of the cash you expect to see come in, and all the cash you expect to see go out. Be prepared to spend some time on this. You’ll need to break down every dollar you plan to spend or receive on a monthly basis for an entire year or until you “break even”—whichever is longest, Geiger suggests. Rent, wages, taxes, marketing costs, even your office supplies should be entered into your forecast.
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, Geiger says. To be on the safe side, Geiger suggests securing 130 percent of the amount your forecast predicts—an extra third or so of your expected need, for cushion.
“The old adage that ‘everything costs more and takes longer than you think’ is true in business,” he says. “You have to prepare for that. You don’t want enough startup cash to scrape by, you want enough to thrive.”
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.
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