By Denis Jakuc
What’s the fuel that powers your startup or business expansion? It’s money, pure and simple. These funds are called a business’s capital requirements. They include startup capital—the money you spend before you launch—and working capital – the money you need to cover the costs of running the business until it reaches positive cash flow, when the revenue coming in exceeds your expenses (at last!).
We cannot overemphasize the importance of accurately estimating your capital requirements. If what you’ve calculated falls short of what you need, your effort can fail before it ever gets off the ground. It’s better to overestimate than to underestimate capital requirements, as investors and lenders may not want to increase their monetary commitment to you if things aren’t proceeding as expected.
Here’s what you need to estimate capital requirements:
A Business Plan with Expense and Revenue Forecasts
This straightforward document has two parts. The first describes the products and services you’ll be offering and the customers you want to attract. Customers can be characterized by gender, age, income level, education, geographic location, etc. Most importantly, customers should be described by the need or needs they have which your products and services will meet. This first part of the plan also outlines the strategies and tactics you’ll use to introduce your business and grow it by both increasing revenues from existing customers and adding new ones through your marketing and sales efforts.
The second part of your business plan is a spreadsheet that maps out your expenses and revenue forecasts—ideally, for the first three years.
Begin by estimating the startup capital you’ll need. Spread these costs over the months you’ll incur them, before you actually launch your startup or business expansion. Expenses should include:
- Fees to attorneys and to the state you’ll incorporate in
- Fees to marketing, financial, and other business consultants you may want to hire
- Upfront real estate costs
- Upfront lease or purchase expenses for vehicles and equipment needed in your office, plant, warehouse, laboratory, etc.
- Personnel costs for staff you hire from the outset
Next, estimate the working capital you’ll need to cover day-to-day operating expenses once your business opens. Get estimates from vendors or suppliers for what their monthly costs will be for different volumes of your business. Provide costs and a timeline to the marketing tactics outlined in the first part of your business plan by consulting with the suppliers you’ll use and researching what others in your field are spending.
Then put together a personnel budget, projecting the number of staff and managers you’ll need over the first three years. Work it by department so you don’t miss any key areas of the business.
Also project the cost of equipment and real estate over three years, forecasting how much—and when—those expenses will increase. Consult with leasing companies for their costs, and with real estate professionals for the price per square foot for your type of space. Finally, include general and administrative expenses, such as insurance, legal and accounting fees, office supplies, travel, etc.
Now you need to project what your sales volume will be, at what price points, and by how much your revenue stream will build month by month. Put these numbers into your spreadsheet for the three years you’re tracking.
Capital Requirements Calculation
You now have a three-year spreadsheet that starts with all the expenses you will incur pre-launch. Add these up, and that’s your startup capital requirement.
Next, add up the monthly ongoing expenses you will incur after you open, and reduce these by the revenue you expect to bring in each month. Each month your expenses exceed your revenues results in a cash deficit. This will grow until the month in which your revenues equal your expenses. This is your breakeven cash flow point. From then on, your business is generating positive cash flow, as long as revenues exceed expenses each month.
Now go back and add up the monthly cash deficits from the month you opened until the month you achieved breakeven cash flow. This total is the working capital requirement—the money needed to fund the cash deficit until you break even. Add this number to your startup capital requirement for the total capital requirements to launch or expand your business.
Note: It’s relatively easy to calculate startup expenses. But it’s much more difficult to forecast how fast revenues will grow in a new venture. Therefore, keep your revenue estimates on the low side and consider increasing your total capital requirements number by 10% to 20%.
For more business plan help, InnovatorsLINK works with premier planning company LivePlan. See our Expert Summary on using LivePlan.
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InnovatorsLINK Business Writer and Brand Strategist
A business writer his entire career and successful businessman. He was a partner in a top-10 Boston ad agency, a senior level executive at Young & Rubicam NY and Interpublic Group, and, since 2003, an independent consultant for companies from startups to global leaders, positioning their brands and writing all forms of content to promote their growth.
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