How Much Capital Do You Need For Your Small Business?

Miscomputing just how much capital you need to start a business is repeatedly cited as one of the top reasons businesses fail. The first thing you need to find out is all the expenses involved with getting started in the first place. Beyond that, however, it will easily be at least 18 months down the line before you start seeing any profits. So many businesses have failed because their owners thought that their sales during the first year or so would be enough to cover operating costs. This is rarely the case.

While most failures come from underestimating the needed capital, overestimating it can also be disastrous. In the first place, trying to come up with too large an amount off the bat will delay you or even prevent you from starting at all, especially if you're asking for the money from a bank or investor. In addition, owing too large an amount means the payments could keep you in the red for too long.

Prepare

It's ridiculous how many businesses start without even a proper business plan. While I will not go into detail on this (this is discussed in another post), one of the critical parts of the plan is figuring out the required budget and coming up with realistic projections on sales. Many starting entrepreneurs are at a loss for where to start looking for this information. It's really really: ask others who came before you.

Ask

Look for businesses similar to yours, and ask the owners about their own experiences back when they were just starting out. Some may refuse to help a future competitor, in which case, you can ask others in another town, places who you will not be directly competitive against. It may be even better to ask your potential suppliers since you could be a future client. Remember to ask about discounts for bulk, possible credit terms, anything to lower your initial needed capital.

You can also ask the experts, such as established trade associations. The SBA also sponsors the Service Corps of Retired Executives (SCORE), who provides resource materials and even mentorship from retired business owners.

Research

Do your homework. Identify everything you will need to spend on, figure out the going rates for each, and come up with realistic projections on your expected sales. Several sites have itemized lists that you can use to help you get started on this.

Good luck!

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