How Much Money Do I Need? Business Start-up costs

You’ve heard it before, and you’ll hear it again, most business fail. And most of them fail because they run out of money.

Not because they don’t have money, but because they didn’t borrow enough in the first place.

So how do you calculate how much you need? First you go through the obvious steps of listing all the monthly amounts of money you’ll need: rent, electricity, telephones, etc. And salary. Don’t forget yourself when you make up the salaries. The so-called “fixed expenses.”

Then you add on the “variable expense,” which are you best guesses for legal advice, building a website, product development, and so on.

All well and good, you have enough to run the business.

Now you guess out how much money you’ll get in. Maybe you think you can sell a thousand items at a thousand dollars each. A million bucks, not bad. Maybe you should ask me to invest.

But wait!

When does that million bucks come in?

Do you get it all at once? Do people give you the thousand dollars on the installment plan? Do you sell to companies that will take 45 days to process your invoice, and then lose the invoice, ask you to resend, and then take another 45 days?

Business fail not because they don’t start with enough money, but because they run out of money. Many companies go down with plenty of money in receivables that haven’t yet turned to cash.

That’s what happened to me. When my company died, I had nearly a million in receivables, but my debts were even higher.

Think about your personal life. You have rent due every month and you get a salary every month. If you spend your salary on something other than rent, you get evicted—even though you have more money coming in next month.

So when you build your business plan, be sure to (very conservatively) estimate not just how much your business will spend and earn, but when you will spend and earn it. Plan this out with each month being a column in your “cash flow” spreadsheet.

Do this right, and you will survive the cash crunch every business has in its first year. Do it wrong, and, well, there’s always room for another business therapist.