How much money do I need to get started?
When considering how much money you need to get started, you need to think about two different amounts of money: start-up costs and working capital. Start-up costs will consist of those things you'll only pay for once at the beginning like equipment, set- up fees, utility down payments, pre-opening salaries and leasehold improvements. Start-up expenses can be estimated using this simple starting cost calculator
Working capital refers to the liquid assets your business has on hand, that is, cash or financial instruments that you can easily convert to cash. In accounting, you calculate working capital by deducting the liabilities of your business from its assets. How much working capital should a business have? Generally, to start your business, we recommend that you have enough money to cover all of your start-up costs plus at least 6 – 12 months worth of working capital.
Finally, you need to take into account cash flow. Indeed, cash flow is king for small businesses and the self-employed. Cash flow refers to the funds that flow into and out of your business during a specified period - most often monthly. You can increase cash flow by increasing sales, reducing operating costs, selling an asset, collecting accounts payable faster or delaying payments to suppliers.
The key difference between these two measures is that working capital provides a snapshot of the present situation, while cash flow is a measure of the company's ability to generate cash over a specific period of time. Monthly or quarterly cash flows will naturally be very different from the amount of cash generated over a 12-month period. As a result, working capital provides an excellent idea about how easily the company can pay immediate liabilities, while cash flow is more of a forward-looking measure.
For this reason, we recommend that small businesses, especially startups, prepare a 3-year monthly cash flow projection. Knowing your numbers in terms of cash flow allows you to plan and anticipate for the coming months. It also gives you enough information to see potential pitfalls within the cash-in and cash-out flow of your business. If there's a shortfall, this might require a short-term injection of cash from family, friends or a bank. Remember, you'll need to share this kind of projection document if you want to secure a loan and prove your ability and timeline for making your loan repayments - another good reason to spend some time calculating cash flow projections. Click here for cash flow projection templates.