How Much Money Do You Need to Start a Business?

Many people underestimate start-up costs and start their business on the back foot financially. This can mean a long crawl up to your breakeven point and into profitability. Quite often it results in the business never making a profit at all.

What you need to do is prepare an estimate of capital costs you will incur on start up. These may include land, buildings, plant, machinery, general equipment, office equipment, furniture and signage. Do this conservatively (i.e., overstate rather than understate). At the end of the estimates, add 20% for costs you haven’t thought of plus cost overruns. You will be surprised (and perhaps horrified) by how quickly unforeseen costs can add up.

You or your accountant should then prepare a cash flow projection for the first twelve months of trading. You will have to estimate sales based on the estimated demand for your product, and you will put in costs according to quotes you have received from your potential suppliers.

This cash flow projection will tell you how much working capital you will need in addition to the start-up capital required to purchase the assets of the business.

Working capital is used to cover early expenses such as rent and insurance premiums paid in advance, electricity and telephone bonds, stationery, advertising and promotion, wages for staff helping you set up, legal, accountancy and consultants’ fees, etc. Many of these expenses will be incurred before you open your doors for trading. There has to be enough money in the kitty to cover them before you start producing an income.

Your cash flow projection will tell you how much money will be in the bank at the end of each month. You use it to determine how much working capital you will need at the outset so that you don’t go into a negative balance at the end of any month. If you find you are going to need more money, don’t just continue regardless and hope it works out. Investigate how you can access more funds or restructure your business so that it can operate with less funds.

Lack of sufficient capital is one of the main reasons many small businesses fail. Preparing capital budgets and cash flow projections are established methods of making sure this doesn’t happen to you.

Related Posts

How to Complete a SWOT Analysis
How to Complete a SWOT Analysis

A SWOT analysis is used to help fine-tune your business strategy by examining internal and external factors that may help or hinder your business. Identifying and understanding the strengths, weaknesses, opportunities, and threats – that’s what SWOT stands for – allows you to address them and make smarter decisions moving forward.
A SWOT analysis will help you to identify each of these characteristics for your business so that you can better understand what you’re doing well, what you could improve, and which external factors could affect your business.

Starting a Small Business: FAQs
Starting a Small Business: FAQs

Here are some of the questions about starting a business that come up frequently.
Q: I’m thinking about turning my hobby into a business. Do I have to form a corporation?
A: No, you don’t have to form a corporation to start a business. There are three basic business structures: sole proprietorship, partnership, and limited liability company (LLC). Most businesses start as sole proprietors, and then progress to becoming a partnership or LLC later.

7 Ways to Tell if Your Business Idea Will Succeed
7 Ways to Tell if Your Business Idea Will Succeed

Document the positives in your business plan to persuade both yourself (the most important person) and stakeholders such as lenders, investors, suppliers and potential customers that your business idea is sound.
1. Your idea has a strong point of difference
To survive in business, you need a compelling point of difference. Period.

LATEST NEWS

Stay Connected

Sign up with your email address to receive news and updates
* indicates required