Whether you’re starting a business, running, growing or buying a business, knowing how much money the business needs will help you choose the right type of finance. Here are some things to think about as you go through the process.
Starting a business
When you start a business, you get all excited about the products, and what are the features, but seldom do we think about how much is needed to start the business. Understanding how to build a budget is key.
Spreadsheets are your friends. If you’re not too keen on that just grab a piece of paper and a pen and jot down all the things that you will need to get going. This will differ from business to business. As a startup, a laptop,
smart phone and data is standard. Software, even if its free, should be on the list. Office space is not a must, as you can work as a nomad, but if you’re looking to get into retail a store, space might be compulsory.
Think about every single thing you may need to kick off the business. This may include customer research, branding marketing materials, printed pamphlets vs. social media posts, a website, website, hosting, a vehicle, fuel for the vehicle, raw materials, packaging, etc.
For a start, just create the list and put the value next to each of it as to what each light at item cost.
Running the business
It’s easy enough to determine how much you need to start a business, it’s more important to know how much you need to run the business. This spreadsheet will be a living document title guide your business.
Figure out which costs once off and which are recurring, for example, stuff, costs, utilities, telephone may be recurring, but website development may be a once off.
Fixed costs are those costs that will be incurred irrespective of whether you are generating revenues or not. Costs like your insurance, employees, telephone, Internet, marketing and promotion, website, development, and hosting, etc. fall under fixed costs.
Variable costs will be incurred and based on usage, such as contractors, utilities, etc.
Build a spreadsheet to help you track monthly how much you will be spending for each of these line items. Keep in mind that each business has basic expenses, that may be the same, but your business may also incur costs that another might not. Be sure to include these in your budget.
As in life, we always told to save for a rainy day, and the same is true for business. They are a number of things that may come up for which you did not budget. So I suggest you add a buffer in for those unforeseen or accounted sneaky little expenses, like a blown tire, or losing your cheapest supplier. Creating wiggle room can be daunting, but he’s a necessary evil.
I generally break this down on a monthly basis and track the variance from what was budgeted versus how much was actually spent. This allows you to better budget for running day-to-day activities - your working capital, as your business grows.
Scaling your business
To understand what’s required for scaling a business, you need to have a solid idea of what the product and business roadmap looks like. Based on this, you will develop a budget. You will work backwards from milestones set to determine how much money you need, and at what point. Remember to:
Your finances should be detailed to cover all aspects. Growth assumptions to be reasonable and logical. If you will be operating at diminished capacity, factor it in.
When you start to scale, increased reliance on systems, processes and people is expected. Determine and cost the impact on each and incorporate into your forecasts and be clear where you need financing, for how long and whether there is sufficient cash flow to cover it.
Do a cost benefit analysis to determine whether the costs will improve profit margins. Not all costs are necessary and it’s important to remain frugal as you begin to scale.
If Covid has taught us anything about saving for a rainy day - be careful not to eat into your cash reserves as this can backfire.
Consider all your financing options - from repayment terms with suppliers and payment terms from customers to the amount you are paying on loans and other banking products.
There’s a plethora of templates out there. Feel free to grab one and customise to your needs. It's always best to first understand the template and then customise. Don’t just punch numbers in without understanding the mechanics behind it.
Get an accountant to look at your numbers
No matter what type of finance you decide on once you know how much you need, get your accountant to help you calculate the implications of each option - be it debt or equity, it will be a big deal. As a founder, not knowing the numbers is not an option.
Financing your working capital
There may be times, so you may not be able to cover your expenses with revenues or savings and may need to seek assistance in the form of debt to cover your walking capital requirements. If trying to avoid the high – interest rate trap. Banks usually offer short-term loans, specifically to cover your working capital requir
ements, but this is expected to be at higher interest rates for shorter periods of time. If you know how long you need the loan for, it’s best to look at long-term financing and your ability to pay the loan back in the quickest possible time.
Do not opt for these types of loans unless you are able to pay it back back in required time and at the set interest-rate. Sit down with your Accountant, if you have one, and determine what your debt schedules and payment plan will look like, should you opt to take a loan. This type of funding should not be the norm, but rather an option should your revenues not cover your daily expenses.
What’s expected by VCs and Angels
This data will be provided to VC and Angel Investors during the due diligence process. It does get interrogated with various lenses, mainly to see where they can add value and help improve profitability. It is also a good indicator of how you handle money in the business - VCs and Angels don’t expect Founders to know every detail, but they do expect you to know your numbers, even if you are not the finance person. So it would be a good idea to do a short course in management finance. This will also help you work well with your CFO or Accounting partners to ask the tough questions and identify areas for continuous improvement.
How we can help you
If you need help building your financial model and pitch deck or want to raise your seed or series A round feel free to contact us to discuss how we can help you move forward. Alternatively, check out our Funding Fix programme to help you raise your round with VCs and Angels.
We do not provide accounting, tax, business, or legal advice. The information provided in this guide is for informational purposes only. Before taking action based on any of the provided content, it is recommended that you consult your own professional advisors.