Estimating the Money You Need
Learn how to quantify your present financial situation accurately by estimating how much money you'll need and how you can obtain the correct amount of capital for your startup or ongoing business.
"A billion here, a billion there, pretty soon it adds up to real money." — Late Senator Everett Dirksen
Pulling a number out of thin air may give you the upper-hand in negotiations, but when it comes to asking a financier for her hard-earned cash, "guesstimates" won't fly.
Whether you want capital for startup costs, short-term operating costs, or long-term strategic development, you must accurately estimate the amount of money you need before you approach a potential investor or lender. Preparing a realistic projection of the necessary funding will not only force you to consider the wide variety of costs associated with your plans but also help convince a lender or investor that you understand your business and the relevant market realities.
What Estimates Financiers Are Looking For
Every financier has his or her own unique estimate requests, but you're generally expected to produce accurate estimates for:
- the amount of money you will need from the beginning to the maturity of the project,
- details on how the money will be used, and
- most importantly, how the money will either be repaid or result in a profit.
This information shouldn't be difficult to locate since all of it should be included in your business plan and confirmed in your financial projections.
You can make your capital projections appear more realistic by referring to the sales and expense information characteristic of your industry and business published in sources such as Dun & Bradstreet's online resources for small businesses. These compilations can provide you with one of the small business owner's best friends: objective data to support your projections of sales figures and anticipated expenses.
When comparing your business to one available from an industry report, select a business rated in the top quartile of the relevant small business market as a model for sales projections. The expenses will not necessarily vary with the success of the business and your overall ratio will appear more positive if you've selected a prosperous reference business.
Common Lender Concerns
Some of your capital needs may raise red flags about the management and future success of your company to potential lenders or investors.
If, for instance, your business is growing, you may think you need additional working capital. But your potential lender may think your need for his or her money isn't a "need" at all, but rather your managerial shortcomings resulting in:
In reality, these potential lenders are often right. But when your business needs additional funds because unanticipated sales volume is creating greater needs for inventory or collection of accounts receivable, you may need to show lenders that your business can expect continued success.
Estimating the Cost of a Startup
Sadly, most startups underestimate their initial costs, ultimately leading to their demise. If you're new to the game, consider completing—at a minimum—a few basic financial statements before attempting to estimate how much money you'll need.
We offer a simple personal financial statement template a bank or other lender will want to see before approving your loan. Download and complete this tool to get a good idea of the types of assets and liabilities a lender will need to consider when evaluating your personal financial status.
In addition to completing a personal financial statement such as the free one we've provided, try preparing the following estimates for initial setup and projected monthly costs.
Determining Initial Setup Costs
How much will it cost to get your business off the ground? Initial setup costs are different for every new business. That's why preparing a personalized, itemized estimate of these costs is paramount.
As you prepare your estimate, include costs such as:
- purchase/lease and installation of
equipment and fixtures
- utility expenses
- Website design
- hardware and software (SaaS) costs
- initial inventory costs
- real estate expenses
- professional costs
- licenses and fees
- employee expenses
- startup supplies
If you're in the the manufacturing business, don't forget additional costs related to raw materials, storage and shipping.
Once you've itemized all initial costs, you (and your financier) will need to know the monthly costs to keep your business running smoothly and efficiently.
Calculating Projected Monthly Expenses
Prepare an itemized statement identifying both your personal living costs and the anticipated monthly costs of operating the business. Be sure to include:
- your living costs
- employee wages
- online software subscriptions
- Website maintenance
- supplies, inventory, raw materials
- lease or mortgage costs
- mobile and office Internet access
- transportation and delivery costs
- any professional costs and any other
- expenses relating to running the business
Once you complete your estimates and financial statements, the real fun begins. Now it's time to dive into all your financing options.
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