Since most of us don’t have trust funds or large amounts of savings with which to start a business, one of our first stops is to the bank to request a loan.This is a critical step which requires a lot of homework, since asking for too much or too little may kill your business right at the start. If you ask for too large a sum you risk rejection, and if the loan is approved you will have to pay interest on money you didn’t really need. And if you ask for too little you may find yourself running out of cash before you were able to give your business a fair chance.
Take these steps to calculate how much cash you will need to get your business off the ground:
Step one: Business plan
Before you approach the bank, put some serious work into creating a business plan for your new venture. Your business plan should contain these components:
- Executive summary – 1-2 pages summarizing the entire plan
- Company summary – Who you are and what you do
- Products and services – Describe what you will offer
- Market analysis summary – Trends in your field and how you intend to bring in customers
- Management summary – How the business and staff will be managed
- Financial plan – Profits, losses and goals
Step Two: Cash flow forecast
The second step in figuring out how much start-up cash you need is to break down every dollar you plan to receive or spend each month for a full year or until you break even. Don’t forget to consider expenses like office supplies, rent, wages, marketing and taxes. Create a spreadsheet or use software dedicated to helping business owners calculate cash flow. This forecast will show how much money you will need and how long you can expect to be operating at a loss.
Start by listing your likely sales for each month. Since you’re just starting out, you will have to estimate this based on customer surveys, information from suppliers and business associates, and the performance of similar businesses.Of course, not all months are equal and factors such as holidays and trade shows will affect your sales.
Next, figure out when you will get paid for your products or services. If you operate in cash, you can assume immediate payment, but if you accept credit cards or are paid on a fixed schedule, you may be waiting a month or two for payment. Make sure you forecast payments on the correct dates so you don’t run out of money in between sales and remuneration.
When you estimate likely costs, remember that there are fixed costs such as rent and wages, and variable costs such as shipping and delivery fees. If you are ordering less stock in a particular month, your delivery fees will be lower than in a month when you predict a sales increase. List all your costs and when you need to pay them to complete your cash flow forecast.
Step three: Add on some extra
Everything always costs more and takes longer than we think it will. So it’s important to secure 130% of the amount you think you need so that you have cash to fall back on when things go wrong. Even if it turns out your forecast was accurate, if you have exactly the “right” amount of funds, you may scrape by but you won’t have the opportunity to grow your business and help it thrive.
Step four: Amend
Once your business is up and running you will have the opportunity to check your predictions against real transactions. Keep meticulous records of sales, payments received and amounts paid and compare them with your forecast. This will allow you to create a more accurate business plan for the coming year and adjust in real time as necessary.