Startup Capital: 5 Steps For Determining How Much Money You Need To Raise
August 22, 2018
You might be overwhelmed by looking at the big picture to determine your startup capital needs, but this is the exact kind of information investors and lenders will need to see before they commit to your project.
Here’s a tried-and-true approach that breaks it down into five manageable steps:
1. Take a bootstrapping approach: Only spend money on those things which are absolutely mission-critical to your business. If you don’t absolutely have to have it, the last thing you want to do is waste time trying to raise money to get it. The more financially conservative and realistic you can be, the better. If you can wait to buy something until you’re actually making some money, then wait.
Depending on your business, a surprising number of expenses can be trimmed while you’re bootstrapping. Do you really need a dedicated office, or will your home office or an inexpensive coworking space do for the time being? Another great example of this would be expensive, completely optional business-optimization software.
2. Categorize your expenses: Determine what your highest-priority expenses are. This is an easy process to do, and you can do it just as easily on longhand on a piece of paper as you can in Excel. Create a three-column list. In your first column, write out each of your one-time expenses. In the second column, write your ongoing fixed expenses (rent/mortgage, insurance, utilities), which will remain stable regardless of anything you do. In the third column, write out the ongoing variable expenses (payroll, sales commission, inventory, marketing) you will have when your business is operating. As you write out this list, it should become clear which expenses should take priority.
3. Do your homework: Research, research, research. Get out there and get the most accurate estimates of what those expenses will actually be in the day-to-day reality of running your business. Some expenses have a huge potential cost range, particularly when it comes to things like identity creation and branding costs.
In other cases, like with operating expenses, all you can do is make an educated guess. Use a high/low range in those situations, and then stress test your budget by using the higher end of those estimates. It’s better to over-estimate and then be pleasantly surprised. You can also talk to non-competitive businesses in your market, or to competitive businesses in a different market, to get some good insights about expenses.
4. Estimate your sales: Sales are the counterbalance to your expenses, and if you’re not making sales, you’re burning through cash. That can only go on for so long before you run out, and then it’s game over. Estimating your sales is trickier than estimating your expenses, and in some ways it’s more of an educated guess.
Use the best information you have to project when you will start consistently making sales, and then plan accordingly. Some companies can make sales from day one. Others may need 30, 60, or 90 days to really ramp their sales operation up and running. The important thing is to have an accurate, realistic estimate of the amount of time it will take to start covering expenses and become cash-flow positive.
5. Calculate your runway: An airplane needs a certain amount of runway to build enough speed to enable it to get off the ground. If there’s not enough runway, it’s not going anywhere. The same thing is true for a startup. To know how much money you need, add up all of your expenses (from #2), and use those numbers to project how much money you will need on a monthly, quarterly, and annual basis. Subtract out the amount you will generate from sales (from #4).
As your sales projections grow, your monthly deficit will decrease. Keep running the numbers out until that number becomes positive. When your cash from your sales exceeds your expenses for three consecutive months, the business can be considered cash-flow positive. Add up all those negative monthly numbers and it will tell you how much money you need to raise to get the business going.
One additional consideration to keep in mind are those industry or business-specific costs that might not fit into this generalized startup model. This can include licenses, permits, duties and fees, or special taxes. This is another case where talking with other companies and entrepreneurs in the same space can really help. Unless they have reason to see your company as a threat, there is a good chance that they might be willing to give you a little guidance or help.
If you’re on step #1, here’s a great way to trim your expenses right now! Review all of your subscriptions. Do you really need your $49/month project management application? What about the monthly fee for the “pro” version of that conference call application? It might only add up to a couple hundred dollars a month, but that can end up making a huge difference when bootstrapping.