Tips for Estimating Startup Capital

Posted On:

The biggest roadblock to an entrepreneur launch of a new corporation is determining how much money is needed. Startup capital is easy to underestimate. But this should not deter you from moving forward with your venture if you follow these basic rules.

First, develop a solid cash flow projection. There are plenty of books and articles to help you understand the process. Or you can hire someone for a few hundred dollars to develop a spreadsheet. But, in most cases, this is something you can perform yourself. It doesn’t require a lot of sophisticated economic modeling.

Simply list in plain language your assumptions for the projection. That is, identify what resources are required to accomplish specific steps in your business plan. These items may include materials and machinery or the costs for personnel, product development, or marketing. Next, list the costs of these resources and when you need obtain them.

Now you have a timeline for expenditures. Follow this by adding income based upon when you expect payment from any sales.

The next step for the cash flow projection is surprising to most entrepreneurs. This vital element involves taking the “completed” projection and revising the whole thing. That’s right…change it. You likely made many correct assumptions, but also left out a lot of items. Go back and add costs for all the details you omitted. Remember to include expenses for office supplies, insurance, legal fees, and income tax return preparation.

Next, subtract all the extra expenditures you don’t really need to incur. If you are going to draw a salary from the start of the new venture, make sure it’s a modest one. Use the least amount of office space necessary. Needless to say, conserving capital for the most useful business purposes means traveling with coach class airfare and staying at inexpensive motels. No business class airfare or four-star hotels.

Lastly, be prepared to continuously revise your cash flow projection as changes emerge in your operations. You will learn to adjust the price for your product as you gather more information from your market. In addition, the timing of sales will change, but your fixed costs will not. You may require more time to penetrate the market with the quantity of sales you’re projecting.

Thanks to electronic spreadsheets, making revisions is an easy process. It will make you an effective manager and permit you to communicate knowledgeably with investors.