How Much Capital Do You Need For A Small Business?

This is a very basic question that many entrepreneurs get wrong. Here’s how to come up with a realistic estimate.

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'll 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 won't go into detail on this (this is discussed in another post), one of the crucial 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 simple really: ask the others who came before you.

Ask

Look for businesses similar to yours, and ask the owners about their own experiences 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 won't be directly competing 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. Business Know-How has a useful Business Startup Cost Calculator with an itemized list to get you started.