8 Simple Steps to Find Out How Much Money You Need to Startup Your Business
You have a very good idea surfing your head for a long time. You are talking all the time about opening up your own business however you feel paralyzed at the starting point. There is no better moment to take action than the present time. As part of any business plan, you need to consider the money aspect, the sooner you answer this question, the sooner you can start taking some appropriate action towards funding your business, for instance you will find what type of entity to approach for funding. Some times you can go for a traditional Business Loan, or you can go for a small loan from your family and friends. Take a look at this simple guide that will help you to figure out one of the most important questions when you are planing your business.
1. Describe your business idea in your own words
Take pen and paper or fire up your laptop and start writing what is in your head. This is usually the most crucial moment of all, the moment you take action. The first thing you need to answer is to conceptualize the business, this means describing how are you going to make the money. For instance if you are thinking on opening a restaurant, you need to describe some specifics about the idea. Try to describe the business in a loose way. Rehearse and refine your your pitch, this will be a good start, eventually your final pitch will come from answering this question. Don't be shy about adding closeups to your narrative in describing things that might excite you, let's say you foresee an aquatic theme that will make the restaurant different from the others.
2. Describe your services or products
Think from the customer's perspective and describe what will you offer , how will that be delivered, at what price. Use an excel spreadsheet to make a list and assign prices if possible.
3. Ask yourself what are your key success factors
This is the one thing that will make or break your business, this answer has to be clear for you and for others. If you are unable to answer this question, there is a good change that you should reconsider your idea in the first place. Every successful business has its own differentiator, otherwise you will become just one of the pack and in the end you will struggle for surviving. Research and find at least 2 direct competitors, try to place them in a map and see how far away are they located
4. Who are your clients?
Knowing your customers is a critical factor for your success, and describing this group is a very useful exercise that can validate your idea. Down the road, studying the demographics could be in itself a task for professional marketeers, however at this point you just need to describe them in general terms.
5. Create a list of startup expenses
Go back to your excel spreadsheet and open up another file, list all the things you need to buy to put together the business as you described it. List first the major items, usually assets such as machinery, vehicles, equipment, furniture, computers. It is always easier to identify the most expensive items. The smaller items are more difficult to identify and sometimes they could add up to great sums of money, so try to do your homework and do a research. This list should be a live lists that can be updated every time you find something new.
6. Monthly expenses
The most classic example here is the rent. This has to be paid every month as well as utilities, internet, wages, insurance. Think about your specific situation and create a complete list. These are fixed costs, they are independent from the sales. You have to pay these regardless of how much you sell. Most entrepreneurs fail to identify properly these expenses and this could lead to unflattering surprises, so be very careful and try to err on the upside to give you some margin in case of mistakes.
7. Variable costs
These are costs that depend on the volume of sales, for instance if you are running a restaurant, the cost of ingredients is directly tied to the volume of prepared food. If you are retailing, the cost of the product is usually a percentage of the total sales. If you can't find obvious expenses in this category, or you find difficulty to measure them, don't worry too much, some times they are minimal and can be allocated a a fixed monthly expense.
8. How much money do I need?
At this point you should be able to answer with certainty if you need financial aid. Simply add up all your Startup Expenses and add 2 or 3 months of monthly expenses. That will give you the total amount of money needed for your business. If your own money is less that the total amount needed then you need to look for financial backup. Make sure you lock the appropriate amount of funds before going forward, otherwise you will suffer from a cash flow deficit which will impede you to operate.