$64,000 Question!

Posted: June 10, 2012 by Chuck Matthews in Money, Startup

Here is the scenario: You have identified a “gap” in the marketplace, a real “pain” point and have devised an elegant solution with solid potential to take full advantage of this emerging unserved and/or underserved market opportunity.  You may have even begun to selectively share your “big idea” with a trusted team and early feedback is very positive.  Your plan is to start relatively small, but in the back of your head, you are thinking this new venture idea of yours could really take off or “scale” as the investors like to say.  Then it hits you: the $64,000 question – literally.  How are you going to finance this new venture?  How much money is it going to take to get this idea off the ground and on solid footing?

Number one source of funding: You!

Actually, results from a longitudinal research study on nascent entrepreneurial ventures (the Panel Study of Entrepreneurial Dynamics) in which I have been engaged with a number of colleagues suggests that the most common sources of start-up capital include: the founder’s own money (90%); credit cards (30.6); spouse (25.1%); friends and family (13.8); bank loans (12.1%); and friends and family of team members (9.4%).  The sample of over 800 nascent entrepreneurs reported that only 3.2% were seeking venture capital for their start-up.

The good news is that according to the Wells Fargo/Gallup Small Business Index survey just completed this past April, 2012, fewer small business owners expect difficulty obtaining credit in the years ahead and in general are carrying less debt than compared to one year ago.  Even given this uptick in financial optimism, lingering uneven economic conditions compel us to take a very hard look at the tasks, timetables, budgets and responsibilities needed to give your new venture a good start.  Let’s examine some of the key things you can do to enhance your personal and business financial planning, make reasonable financial (and sales) assumptions, and take charge of your new venture’s financial health.

Conduct a personal and business financial audit

When starting a new business, I strongly recommend you conduct a personal and a business financial audit.  On the personal front, ask yourself the following key questions:  What are your personal monthly living expenses? Where can you or are you willing to cut back?  How much outstanding debt do you have?  How much do you have in savings?  On the personal financial side of the house, a good rule of thumb is to calculate the amount needed to cover six to eighteen months of living expenses in order to better understand your personal financial needs as you plan and launch your venture.

On the new venture financial audit side of the house, ask yourself the following two key questions:  How much start-up capital do you need and what are your working capital requirements?  Start-up expenses might include but are not limited to such items as leasehold improvements, licenses and permit fees, professional fees such as legal and accounting, initial inventory costs, and other expenses specific with starting your business.  On the working capital front, you will want to include on-going monthly expenses associated with how and where are you doing business.  The rule of thumb here is to identify the cash needs which allow the business to meet daily operating expenses.  Over time, your working capital will be the measure of your operating liquidity, so eventually you will want to work toward establishing a working capital reserve fund, but always bear in mind, cash is king.  The day you are unable to pay your most pressing creditor is the day your business fails.  Also, you will want to match your short-term financial needs with short-term financing and long-term needs with long-term financing.

Planning assumptions are crucial

Another rule of thumb centers on the initial planning assumptions which are used to calculate your costs, sales, margins, and timing of cash flows.  Keep it simple to start, but remember it will need to be adjusted over time as your business grows:

1)    Calculate the start-up funds needed.  Determine how much over what period of time, what will it be used for, and what is the “ask” if seeking outside debt and/or equity.  Also, what are the needed salaries and wages for yourself and your employees (often too low or overlooked all together);

2)    Estimate your monthly fixed operating expenses;

3)    Prepare a projected sales forecast.  This is the heart and soul of the planning assumptions.  I recommend that you prepare a worst case scenario along with the expected case just to be prepared.  Also, what is the projected growth rate for your business and is it in line with industry averages; and

4)    Calculate and monitor the timing of cash flows.  As noted above, cash is king and cash early is always better than cash late.

Armed with this information, you are better prepared to answer the $64,000 question.  Till next time, all the best for continued entrepreneurial success!  For more information

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