Basic steps to determine the capital needed to launch your business

Many entrepreneurs seeking to setup businesses realize that their biggest challenge is the lack of sufficient capital. The startup capital is the money needed by the entrepreneur to finance the production and sale of goods so that the business can reach a break-even point.

In this regard, experts note that more than half of businesses fail within the first two years of their inception, mainly because of the lack of capital needed to sustain their operations. In addition, experts stress that all businesses will need capital either for start up or for financing during their initial years of incorporation.

Experts believe that successful business owners will always be able to realistically estimate the capital they need to run their business, which will prevent them from failing later.

Because this process is extremely important, experts urge those wishing to start their own business to carry out a comprehensive assessment of the required startup capital from the onset of the project to ensure the success and continuity of his business.

Key steps to identify the necessary startup capital include:

Creating a budget

In order to determine the required startup capital for your business, you need to draft a budget that includes all expenses and revenues.

Expenses should include recurrent costs such as the monthly lease, water and electricity costs, staff salaries and taxes. Also, do not forget to include one-time expenses, which include enterprise license fees, incorporation costs and branding costs.

Setting up and completing the budget correctly is the most challenging part of starting a business. The owners of these businesses may make a mistake in estimating costs or fail to draft an appropriate budget for additional costs, because they do not know that such expenses should be included in the budget.

To facilitate this task, it is good to include all expenses in a spreadsheet. This spreadsheet should include sections for initial startup costs, fixed costs and variable costs.

Initial startup costs

These are the costs you will incur to launch your business, including business licenses and permits, office supplies and marketing costs, which include printing business cards, official letters, publications and newspaper advertisements, all of which are mandatory costs.

Fixed costs

The costs you will incur in order to run your business, whether you will be making profit or not. These costs include insurance fees, loan payments, rent, equipments, inventory, as well as the employer’s income.

Variable costs

These costs vary significantly from month to month and depend on the nature of the business. These costs include shipping and delivery charges, advertising payments and employee salaries.

Necessary or optional expenses

Once the budget has been completed, it is necessary to review all expenses included therein to determine whether these expenses are necessary to the success of the company or are merely optional expenses. Hence, any capital the employer will receive should cover at least all necessary expenses, and it would be preferable to have sufficient funds to cover the optional expenses. All budget estimates should include an additional reserve amount, so that any unforeseen expenses can be covered.

Identifying capital requirements

The main reason for setting up a budget is to determine the total amount of capital you need to run your business and achieve positive cash flow. Once you have finished estimating your startup capital, you can determine the amount and type of financing to generate that capital. Always remember that securing enough capital determines whether or not your business will succeed.

Calculation of costs in detail to identify the capital:

Completing marketing strategy plan

In this plan, you can describe the products and services you will provide, as well as the strategies you intend to adopt to distribute and market your products. You can also specify when each strategy will be applied, such as setting an advertising schedule and identifying  media outlets to advertise in.

Calculating product development costs

You can consult with vendors or suppliers to obtain cost estimates, so you can narrow down the range and make accurate estimates.

Setting up a marketing budget

The strategic marketing plan provides you with information about the marketing methods you will adopt, and includes the estimated costs of these methods, based on consultation with the vendors and suppliers you have selected in advance. You can also conduct a comprehensive search to find out and compare what other companies, operating in the same field, spend.

Setting up a staff budget

You should make clear estimates of the number of employees and members of the management team you will need to employ during the first three years. You can then assign these employees into the different departments of the company to ensure that you did not overlook any of the functional areas.

Estimating equipments and facilities costs

You should also identify the space you need to launch your business. This space can include office space, retail space or warehouse space, depending on the nature of your business.

You can seek advice from real estate professionals to estimate the cost per square foot. Also, do not forget to include your office equipment cost, including computers and telephone networks, within your equipment’s cost forecasts.

Separation of costs

You should separate the startup costs from recurring costs after launching your business.

Completing revenue forecasts

Create financial forms that include assumptions on sales volume and prices, and then create a spreadsheet with the expected revenue on a monthly period over the first three years. Then determine the total expected expenses for each of these years, and calculate the time the company will take to reach the break-even point (where the value of expenses is equal to the revenues). Do not forget to calculate the cash deficit for these months.

Calculating the required startup capital

Finally, add the required capital to launch your business to the capital required to finance the cash deficit, and then you will obtain the total required startup capital.