New businesses run on the essential supply of periodic financing. One of the greatest challenges facing entrepreneurs is ensuring adequate capital flows to meet expenses. But if you don’t know how much you will need, would you know how much to raise for the future? A realistic assessment of revenues and costs is required to sail through the initial tough period.
Source: Startup Explore
To ensure your business has adequate funds, it is imperative to estimate future financial requirements based on past trends. Once this is accomplished, the deficit between what you have and what you need can be closed through fundraising.
The first step is to determine expenses, which can be divided into start-up costs or one-time costs and recurring costs. Start-up costs typically include registration, legal and professional costs for setting the business up, licence and permit fee, physical assets such as real estate, machinery or vehicles, office supplies, website design etc. Recurring expenses, on the other hand, include rent payments, salaries, marketing and advertising costs, financing costs, raw material etc. Once you can put a number (or a range) on your initial and projected expenses, determine the sum you have for them.
Start with an estimate of your starting capital and the monthly revenue you expect to generate. Now, this needs to a figure you can realistically expect, not what you aspire for. To come to this number, look at metrics like market size, price points and industry averages.
Source: Monk London
Next, use your estimated resources and expenses to build financial projections for your business. This is typically done through Excel-based financial models that range from the very basic to significantly complicated. Study your projections to determine if you have a shortfall.
Voila, now you are well aware of your startup’s financing needs!
A savvy business owner will then need to ask the following questions to determine the entity’s capital needs:
- Does my business need additional capital or are my cash flows sufficient?
- Which areas are experiencing a shortfall and how do I plug the gap (equity, debt etc.)?
- Do I need money to start/expand my business or as a cushion against risk?
- What are the risks involved in the various modes of fundraising and is my business equipped to handle them?
You may ask, why do I need to project figures five years into the future? Why can’t we cross the river when we get there? Remember, it is way harder to secure funding when your firm is already in trouble. Extensive and solid planning for the future will not just save the day but also help you run daily operations efficiently.