One of my friends just wasted six months and lost $75,000 because he tried to launch a business before discovering he had insufficient funding. Do you have enough money?
Answering these five key questions would have let him know that he didn’t really have enough funds and prepared him before he spent too much money or went out in search of funding.
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How Much Money Will I Invest to Start My Business?
Start with how much:
- Money you have from all sources except retirement funds;
- You need to live on until the business has been operating for one year, and
- You are willing to invest in your business.
If you’re not willing to commit most of your funds, it’s not likely anyone else will be willing to provide you with financing.
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How Much Will It Cost to Open My Business?
Develop a detailed list of every anticipated cost that you will have to spend before generating revenue. You can use this partial top-line list as a starter, realizing that many of these segments have a dozen or more specific costs needing to be estimated.
- Legal
- Insurance
- Accounting
- Government
- Facilities
- Systems
- Inventory
- Marketing preparation
- Staffing
Don’t obsess about being precise. Stop working on your start-up costs when you are confident that the total is +/- 10%.
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How Much Will It Cost to Run My Business Before I’m Breaking Even?
You have to estimate Year 1 revenue and costs by month, including:
- Product/service
- Operating
- Employees
- Accounting
- Insurance
- Marketing
- Facilities
- Distribution
Each one of these categories needs to be forecasted for every segment of your business, as well as your business in total.
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How Big of a Financial Reserve Do I Need?
You need to be able to cover:
- Your living expenses (paired down as much as possible) for one year
- Slower start up than anticipated
- Higher costs than anticipated
These last two typically are ball-parked at about 25% lower sales and 10%/unit higher costs.
At this point, you can determine how much money you need to start your business.
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Will Anyone Loan Me Enough Money So I Can Start My Business?
If you need funds to launch and run your business for one year, then banks and other investors will look for:
- Solid business plan
- Your background
- Relevance to the business
- Financial credibility
- What percentage you’re investing of:
- You’re total net worth, and
- The amount necessary to start and run the business.
When you step back and review these financials, you should be able to determine whether you have a plan that has potential:
- For success, and
- To entice others to invest in your business to help get it started.
Need help? I recommend you contact SCORE and talk with one of their volunteer counselors.
(This content was originally posted at Entrepreneurs Questions.)