STARTUP CAPITAL

How much startup capital do you need? This is the question that all potential business people need to ask themselves before finally deciding on a business.

You have had your idea for a new business, researched it and prepared a draft business plan. Now you need to draw up a budget to show you the amount of capital you will require to get your business up and running.This is an essential part of preparing for business and can’t be skipped. Without a good idea of the amount of startup capital you will need and having the capital available you are doomed to failure.

Getting this right is a must and is not difficult. All you really need to put together is a reasonable assumption of all your startup capital costs.

Here is how I recommend you do it.

Startup Capital Requirements

At startup, all businesses require enough capital on hand to carry them through till the business turns its first profit.

Many potentially profitable businesses have not made it simply because their owners did not have enough cash on hand to do this. What a waste!

Another thing to remember is that at startup you need to have provided for TWO different startup capital requirements.

The first is for your one time costs that will allow you to open your doors.

The second is the money that you will need, to cover your monthly ongoing running costs, until you break even.

Let’s get down to it then and make a start.

Using your draft business plan as the basis of your startup capital budget, you will have a good idea of what you will need to do to get started in business. You now need to put a cost to your needs.

What will be required will very much depend on your type of business, but here are the major expenses that you can expect.

BUSINESS BUDGETING

Startup Expenses

• Are you going to rent or build? If renting you will have to put down a deposit plus at least the first months rent. If building you need to know the costs.
• If renting, are you going to have any remodeling or redecorating costs?
• Will you need any manufacturing equipment and tools? Build these costs into your capital requirements.
• Furniture and fittings are always needed by most businesses so at least budget to have the minimum.
• Stationary, office and cleaning supplies.
• What inventory will you need at hand for startup? Be careful here, the amount will very much depend on the business.

  Re-supply times will generally allow you to judge how much inventory you will need.

• If you are going to advertise and promote your opening, budget the maximum possible cost.
• Signage costs also must be taken into account
• All your other service needs that require payment before startup such as insurance, attorney, accounting, cleaning, etc must be taken into account.
• If you are leasing office machinery, telephones or vehicles, again budget.
• What licenses and permits need to be obtained and how much will they cost?
• Any cash needed for floats, etc.
• All the other pre-startup expenses that you can think of and which relate to your business.

Finally, it is an unwritten law that despite all your careful planning and budgeting, you will need more startup capital than you think, so allocate a good extra percentage to cover the unexpected.

Now lets move on to your monthly running expense requirements.

Ongoing Expenses

Until you break even, you will not have sufficient cash coming in to cover your monthly expenses and so you need to have made provisions to have it available. Before you can do that you will have had to put together your budget as follows:-

• Rent or mortgage repayment
• Loan payments
• Any inventory replacement not covered by cash sales
• Advertising expenses
• Labor expenses, including taxes
• Lease and interest payments
• Bank charges
• Credit card payments and charges
• Monthly insurance
• Office and other expenses
• Repairs and maintenance
• Telephones, light and water costs
• Suppliers bills.
• Sales taxes.
• Professional fees.
• Transport and delivery costs.
• Finally, remember to allocate cash for your salary.

NOTE

1. How many months you budget for your ongoing expenses will depend on the type of business.
2. If you estimate that your business should reach breakeven and then start showing a profit after, say three months, budget for those three months cash needs at least.
3. If it is going to take a year before you start showing a profit, then you will need to plan on having a years cash available to cover your startup capital expenses.

Think optimistically, but plan conservatively.

1. When doing your budget, try and look at your cost figures as a base line budget.
2. If the business turns out to be better than expected, you will exceed your budgeted profit figure, which is the upside and is something to aim for.
3. On the other hand, if you just can’t meet your budgeted figures, you need to have a downside plan available, your Plan “B”.

Lay out these three scenarios when preparing your budget and if or when needed they will be available.

Putting it together

Once you have put together your budget, you will have a pretty good idea of your startup capital funding needs. Now you can either put together the cash required from your own resources, borrow it or change the plan. If you decide that the whole idea is just too much for you, you can down size, go for another cheaper business or give up the idea.

Spend time on your initial budget and once completed, don’t change it. This is the base line of your business and should be used to measure your actual performance against it during the year.

If there are dramatic changes in circumstances, you can amend your budget figures in a forecast, but don’t change your original budget.

Once you are into profit, your small business finances will change somewhat and you will no longer need your startup capital budget as, by then you will be using an annual financial budget.

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