Careful working-capital calculations to start a business are particularly important during an economic downturn. Follow these steps to make sure you have enough money to stay in business.
Learn About Your Industry
From the beginning, you need to know two things: how much a business in your industry typically spends to open its doors, and how long it will likely take the business to become profitable. To find these facts, seek out statistics for your industry. If you’re opening a restaurant, for instance, call your state’s restaurant association, which may have data it can share. State or federal government agencies or your local Small Business Administration office may also be good sources of statistics on business startups.
Network, Network, Network
There’s only one place to get the real lowdown on business costs: from other business owners. Join local industry associations and befriend business owners of similar business types. Try to get answers to questions such as what costs took them by surprise when they first opened? What were their biggest costs? How did they keep costs down in those early months? How long did it take to break even? What were the most cost-effective ways of marketing the business? How many employees are needed, and what’s the going pay rate?
Don’t forget to ask about revenue as well. You need to know how much money the business will likely bring in during those early months. If local business owners in your sector view you as competition and clam up, try chatting up an owner of a business that’s similar to yours but located in another town.
If business owners won’t give you details about their own businesses, ask if they are willing to give you a blank financial statement, with all the numbers removed. This will at least show you all the expense categories you need to think about.
New business owners are often ignorant of the full range of expenses they’ll have, such as the cost of workers’ compensation insurance, unemployment payments, required state license fees, business taxes, and association dues. Having the blank statement will help prevent surprise costs that aren’t in your working-capital budget.
Talk to Experts
Business owners provide excellent firsthand knowledge of working-capital needs, but good business consultants, accountants, and attorneys offer broad expertise you won’t find elsewhere. As your business grows, these advisors will become increasingly important; so if you can connect with a few strong advisors early on, all the better.
Consider the Recession Factor
If the economy is slow in your market, you’ll likely want to plan on additional working-capital reserves beyond what experts and business owners tell you that you need. If other owners started in boom times, remember that your situation is different.
Find the Money
One thing to remember about working capital is you don’t have to have it all in cash, all at once. Once you’ve come up with your working-capital estimate, just make sure you will have access to the cash you need as you get your business off the ground. If you can open a bank line of credit, you’ll have money you can tap as you need it.
Besides banks, consider other possible sources of capital, such as family and friends, vendors, angel investors, and venture capital firms, depending on the nature and scope of your business. One increasingly popular option is peer-to-peer online lending sites such as Prosper.com and Zopa.com, where individual citizens lend money directly to business owners.
Business reporter Carol Tice contributes to several national and regional business publications.