- Just how much cash does a small start-up need? This is one of the first questions people ask, but unfortunately there's no definitive answer.
- If you're looking to get funding and support from investors or stakeholders, you'll need to prepare a solid business plan with calculations that cover all key areas of expense.
- Find out what you need to do to calculate how much cash your startup needs and set yourself up for success.
Just how much cash does a start-up need?
In my experience, the simple answer is “a lot more than you think”.
The lack of cash to fund SME growth is the single biggest cause of business failures and yet it need not be so.
With a proper understanding of business dynamics and risk, cautious budgeting and the regular monitoring of your performance against your budgets, you are already a long way along the path to securing your future.
How Much Do I Need to Start a Small Business?
In order to assess how much cash you'll need to start a business, you need to follow three steps:
- Be honest with yourself
- Calculate the cash needed for three key expenses
- Engage stakeholders if necessary
1. Be honest with yourself
Be totally honest with yourself when assessing your business plans, don’t plan on what you hope will happen, don’t even plan on what you think will happen. Plan on what you know you can achieve and then allow for the unexpected.
Over the span of a long career, I would estimate that 80% of the start-up budgets I have seen overestimate sales and cash flow, whilst underestimating costs and cash burn.
This will possibly frighten you but you should have sufficient cash on hand at the start of your business to cover at least six months of total costs and operating expenses and you should maintain this cover throughout the growth of your business.
If your business concept is realistic and your business plan and budgets well thought through you will almost certainly succeed but be very realistic when budgeting.
2. Calculate the cash needed for three key expenses
When writing your business plan and establishing budgets calculate the cash needed in year 1 to meet your three key areas of expense; Cost of Entry – or Capital Expenditure (CAPEX); - Cost of Goods Sold - (COGS) and finally Operating Expenses - (OPEX).
If after careful consideration and budgeting the sum is higher than you thought, see what if anything can be scaled back, without losing sight of your concept and what cash is really going to be needed to deliver the objectives.
Do not despair if the cash needed is more than you thought or indeed more than you have available. The cash needed is the cash needed so plan for it.
In respect of Revenues employ caution in the quantum of sales you project. A mistake here will cost you dearly and don’t expect your customers to pay you on time. Most “good” debtors pay in 30 days but it is usually 30 days from the end of the month in which you invoice and if they are savvy buyers they will order in the first week of the month thus getting almost 60 days to pay.
3. Engage stakeholders if necessary
The business plan and budgets are written and after due and diligent consideration you feel you are short of cash then “stay calm and engage stakeholders”.
The stakeholders in your business include you, your family, your investors, your staff, suppliers and customers.
If your business plan is sound and well-articulated and explained, each of these stakeholders will support you. Your family will probably support you best by understanding long hours worked and tiredness at home.
Your investor in making the decision to back you and your idea has the most to gain by supporting and helping you meet goals. The investor is probably experienced and can be a great mentor and sounding board for you so use the relationship and value it.
Your customers and suppliers both stand to gain through your business success so engage them, show them your plans and discuss the terms on which you need to trade. Treat them with respect and they will return the favour in heaps.
We are yet to answer the big question: Just how much cash does an SME startup need? It’s a bit like the question; how long is a piece of string and the answer is the same……it’s as long as it is, or it needs as much cash as it needs.
Don’t be worried by this, in almost 30 years of SME experience I have always had access to more investor cash than I have had to good ideas and people to back.
If you have confidence in yourself and your plan and need an investor, speak with local accountants, financial planners and lawyers, they will almost certainly know someone looking to invest funds in a sound idea.
Most importantly if you think you need $8.00 ask for $10.00 it’s much easier to return funds with a little interest than to ask for more. Again if you think your first year's profit is going to be $10.00 write it up as $8.00 and come in ahead of budget. Everyone loves a winner and success spreads!
Follow these simple steps and you should be set for a successful future with loyal stakeholders willing to follow you into your next bigger venture.
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