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Calculating Your Cash Needs

Management skills, understanding the industry and current market conditions all influence whether or not a start-up business will ultimately succeed or fail. However, of all the factors that determine a start up's success, perhaps the most important is an accurate assessment of initial cash needs.

Seldom can a business owner start up a new enterprise without having to take out a loan or find some other form of financing. Most entrepreneurs require at least some start up financing for their business. Accurately and realistically determining a business's financial needs directly affects the business' chance of success.

Six Months to Stability
To estimate financing costs, experts recommend that a start-up owner estimates the amount of money he will need to cover all costs for the first six months of start up. Once established, many businesses prefer to have enough capital to cover operating expenses for 12 months. Yet, this is an unlikely financing target for most start-ups. In general, financial institutions won't cover the costs of a start-up's first year. Similarly, loan payments for an entire year of operation would cripple most start-ups. Six months, however, is a reasonable financing target.

Researching Finances
More than one business has stalled out while determining the amount of capital required for the first six months of operation. Arriving at an accurate start-up cost figure requires a fair amount of research followed by some realistic number-crunching.

Some sources for researching start up financing information include:

Libraries: Although libraries can be overlooked with today's emphasis on online information, they remain one of the best sources of information for business research. Not only do libraries offer extensive research materials, but librarians also have research skills that the average businessman lacks, often helping a perspective start-up owner find facts and materials that he may overlook.

Other Businesses: Seeking advice from established businesses is a double-edged sword. On the one hand, who better to offer advice on start-up costs than business owners who have successfully navigated through the process? On the other hand, because these are the businesses you'll be competing against, they may be unwilling to advise potential competitors. Seeking interviews and advice from similar businesses not within your business's neighborhood may yield better results.

Trade Associations: Nearly every industry has its own trade association. Trade associations are industry networks that publish start-up brochures and pamphlets containing other relevant information, including start-up costs.

Trade Shows: Attend industry trade shows and talk to as many people as possible. These gatherings bring together large numbers of people with knowledge and experience in your industry. Trade shows provide a helpful forum in which you can learn new tricks of the trade, as well as get advice on how to be more efficient at what you do.

Web Sites: Small business administrations, trade associations and similar organizations may have helpful start up information on their web sites. Take the time, however, to check online information against other sources since some web sites may have inaccurate or outdated information.

Calculating Initial Costs
Once you've done your research, it's time to figure out your business' start-up needs. Begin with the initial expenses required to start the business. Keep in mind that this figure won't be your monthly expenses; it's the amount required to start, not maintain, the business.

Factors that determine your initial costs include:

• accounting fees
• furniture
• incorporation fees
• inventory
• legal fees
• marketing fees
• office supplies
• remodeling or renovations
• rent and security deposit (or real estate purchase)
• signage
• specialized equipment.

While this is just a broad outline of start-up costs, each industry has unique costs associated with starting a new business. Try to cover every possible contingency.

Monthly Start up Costs
Once a figure for initial start up costs is calculated, monthly business costs must also be determined. Factors that influence monthly business costs include:

• insurance
• inventory restocking
• marketing / advertising costs
• monthly debt payments
• monthly utility payments (electricity, heat, water)
• Payroll
• Rent / mortgage payments
• Taxes
• Travel costs
• Working capital.

As with initial start-up costs, each industry will have its own unique monthly costs, which also need to be factored into monthly calculations. Remember, it's important to be realistic. Overly conservative estimations will leave the business short of cash during those all-important first months of operation. Extravagant estimates will lower the chance of acquiring necessary financing, or lead to difficulties paying back financing loans.

Be conservative in your estimates, but don't underestimate the monthly cost of doing business. This is a delicate balancing act, and it's often wise to run your numbers past business colleagues or an accountant to verify that you're on the right track...

Adding It Up
Once calculations are complete for both initial start-up expenses and monthly expenses, it's time to calculate the actual amount of start-up financing you'll need. Presuming you want enough financing to cover the first six months of business, multiply your estimated monthly costs by six. Now add your six-month expenses to your initial start-up costs to arrive at the amount of financing you need.

For example, a business may require $19,000 worth of initial start-up funds, and have an estimated monthly expense of $5,000. Multiplying $5,000 by 6 results in $30,000. Adding $30,000 to the initial start up of $19,000 results in $49,000 that must be raised.

Revisiting Needs
As a business grows, new costs and expenditures inevitably appear. Such expenditures can usually be absorbed into an established company's budget. For a start-up business, however, financial surprises can be devastating. Before reaching a final decision on how much start-up capital you need, take the time to consider as many possible scenarios as possible. It's better to factor in some extra working capital initially than to be hit with a financial sucker punch in the fourth month of business operations.

Go back over your calculations at least once before seeking financing. Ask yourself if there are any hidden costs you may or may not have considered. Have you realistically calculated how much inventory you need? Have you factored in enough for sufficient staffing, staff wage increases, and benefits? How realistic are your estimates for first-year profits? It's best to ask these questions before starting your hunt for financing. You don't want potential financers asking these questions of you unless you already know the answers.