Determining the actual amount of investment a business needs to get started varies greatly. Home-based businesses tend to require less capital, while larger-scale endeavors can require much more.
Starting a business encompasses many resources, including time, energy, and most importantly, cash. Many businesses fail during infancy simply because of insufficient working capital before they reach a point of profitability and consistent positive cash flow.
According to an article in Business News Daily, startups should have enough cash to cover six months of fixed costs. Just like your household budget should have a contingency plan to cover for job loss or illness, your business must have a nest egg for unforeseen issues and dips in revenue.
Estimating your fixed costs is extremely important, and you should include all possible expenses. Take the time to investigate everything from the true cost of employee benefits to utilities. Remember to include loan payments, subscriptions, insurance, marketing, and other cash outflows you will incur. Even the smallest expense should be included.
To calculate cash flow, you will need to estimate the income for your business. This is tricky because without historical income data, it is difficult to make sales projections. It really comes down to an educated guess. When estimating your income, consider different scenarios, from best case to worst case. Other things to consider when planning cash flow for your business:
- Know your profit margins – how much can you keep from every dollar sold?
- Consider from where your first few months of sales may come. Do you have potential contracts or customers lined up?
- Calculate any seasonal fluctuations into your income estimates. How do holidays or other events affect your particular business?
- Stay on top of the trends in your industry and watch for opportunities and threats.
Anticipating different variables can reduce startup shock and help prepare you for different scenarios. Having enough cash to cover your worst-case scenario can help get you through the rough patches.
When contemplating a new business, you need more than just a great idea. Turning that idea into a viable business takes time, energy, and cash.