Too frequently, a new entrepreneur will underestimate how much money it will take to start a business. The result is usually that the owner ends up in a cash flow pinch, and that’s a tough time to have to go out and find financing. It’s important to anticipate how much money you will need, and do some contingency planning around where you will be able to get it.
How much you need depends on how you are defining your business — that is, it depends on your Business Plan. I know, I know, some people who will tell you that you don’t need a business plan. Don’t believe them. As a minimum, outline:
- What will be the cost of any equipment you will need to buy
- What will be the cost of any inventory you will need to start
- What will be the cost of services you will need in Year 1 and Year 2. Include business services (phones, Internet, etc.) and professional services (accountant, attorney, etc.)
- How much will it cost you in Year 1 and Year 2 to rent or lease the space you will need
- How much money will you need to live on during Year 1 and Year 2
There are other factors, but you can use these to estimate how much working capital you will need. Consider this a minimum number.
- Estimate what your product or service will sell for.
- Make a conservative estimate of how many of those you expect to sell in Year 1 and Year 2.
This will help you forecast revenue, but understand that your revenue will lag behind expenditures by 6-months to a year.
The U.S. Small Business Administration (SBA) has a complete Small Business Planner, and in it they refer users to bplans.com for sample business plans (some are free, some are not). Don’t tell yourself it’s too much trouble. How much trouble will it be to invest time and money in a business that fails to take off because you underestimated your costs? Take the above information and plug it into a business plan.
After you have a handle on how much money you will need, check out Sources of Business Startup Money. Line up what you will absolutely need up front (your own pockets, family and friends, line of credit), and be prepared to seek other sources (such as a bank loan) when you can demonstrate you are generating revenue.