How to determine your new company’s financial needs
One of the biggest challenges of starting a new business is making sure you’ll have enough money to see you through the challenging first months.
Without adequate financial resources, your business will have a hard time finding its footing. Entrepreneurs also need to be realistic about how long it will take for revenues to catch up to costs. You may have to endure losses for one or two years—perhaps even longer—and you will need money to tide you over.
To ensure you have adequate funds, it’s important to estimate your financial needs before starting a new business. The first step is to figure out your expenses. These can be divided into one-time start-up costs and recurring expenses.
Add up costs
One-time costs may include such items as legal and professional costs for incorporating or registering your business; starting inventory; licence and permit fees; office supplies and equipment; long-term assets, such as machinery, a vehicle or real estate; consulting services; and website design.
Recurring expenses will include such items as salaries, rent or lease payments, raw materials, marketing costs, office and plant overhead, financing costs, maintenance and professional fees.
Once you’ve determined your initial and follow-on expenses, you will need to estimate how much money you will have at your disposal.
Calculate your financial resources
Estimate how much starting capital you will have and the amount of revenue you’ll be able to generate each month during the start-up period. To calculate the latter, research your potential market and industry averages to come up with realistic numbers.
Now, plug your estimated financial resources and your estimated expenses into a set of financial projections for your business. A quick examination of your projections will show if you’ll have a financial shortfall.
To meet any gap in funds, here are sources you can tap:
1. Personal investment
Most start-ups require some personal investment by the entrepreneur—either cash or personal assets used as collateral to secure financing. If you foresee a cash shortfall, you may need to dig deeper into your personal assets.
2. Friends and family
Many new entrepreneurs rely on capital from family and friends (sometimes known as “love money”). Family and friends often don’t mind waiting to be repaid until profits start rolling in, but it can be challenging to mix business with personal relationships.
3. Debt financing
Lenders offer various types of debt financing including term loans and lines of credit. Some lenders offer loans specifically designed for new business ventures that come with flexible repayment terms.
4. Outside equity financing
Businesses with high growth potential may be able to secure start-up money from angel investors, business incubators (also known as accelerators) or venture capital funds. Funds from these sources are usually given in exchange for an equity position in the company.
5. Grants and subsidies
Some companies may be eligible for government grants and subsidies to help with start-up costs.