You are ready to start, you know the business structure, the resources you need to begin and how to maintain a vibrant flow of new customers. One last thing to check – how will you pay for it all?
When considering how much funding you need to start your business you need to consider:
- How long until your first sale from now
- When will you make a profit
- How much money you need to fund the business until profit
These three elements will give you key information in determining how much money you need to start up. They will give you the foundations of your cash flow in the business.
A healthy cash flow is essential for any business, big or small. If the business runs out of money, it will be impossible to pay suppliers. You may have to get other short term finance which may be expensive and it could become a very difficult time for you to trade out of.
To avoid this happening, you need to estimate your future cash flow. This way, you can be sure that your business has enough cash to pay its way, and you can keep growing.
This is set out like a profit and loss forecast but instead of showing when a sale is made; you put in the amounts when the bill is paid.
Like a Profit & Loss statement, there are two parts – cash in and cash out!
This is the moment your business receives cash in from a customer. If you get paid in cash at the moment you make that sale – like a retail business, then you would put that payment in the same month.
However, if you invoice, in one month and get paid 30 days later, then you would not enter that payment until the month it was paid and in your bank account.
This is the day the money leaves your account to pay for your supplies and operating expenses.
Once you have completed your cash flow, you will have a good idea how much money your business will need to get started, and to operate in the first year. It may be that you decide to grow organically, and only spend the money as you have it in your bank accounts, or when you have an invoice ready to be paid.
Expanding in this way limits your risk. Only spending when you have the cash to cover it, and investing in new staff and equipment when the guaranteed orders require the increased capacity. The other benefit of this type of growth and self-funding of the business is that you will continue to own the business yourself.
The downside is that it may hamper your growth, limit your expansion into new areas and slow your ability to seize opportunities as they open up, and surpass the competition.
Like any part of setting up a business, this requires careful thought, calculations and diligence to study your competition and learn from their experiences.
In addition to calculating how much your business needs to start up, you must also consider your living expenses. A founder who can’t pay her mortgage or utilities will not be in the right frame of mind to grow her business.
At this stage of the business planning, I recommend that you calculate how much your monthly living expenses are, and ensure that you have at least eight months coverage. This way, you can focus on building the business instead of worrying about making a mortgage payment.
This is an excerpt from my latest book “My New Business – a busy woman’s guide to start up success”. You can buy it from Amazon here
I would love your comments and questions on funding start ups…..please comment below.