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How Much Are You Looking For?

August 29, 2017

According to Ross Finlay, co-founder and director of the First Angel Network, it's one of the first questions any lender is going to ask when approached to finance a startup. It’s a number that should be concise and defendable. And determining that number is as simple as one, two, three.  

 

To be clear, for most startups forecasting your capital requirements will not require you to know the Fundamental Theorem of Arithmetic; however it is an exercise that deserves your full attention and consideration. Based on a wide variety of statistical data, the vast majority of evidence suggests over 70% of startup failures can be attributed to under-funding and/or, money mismanagement. So, let’s get this right.

 

In order to avoid problems with under-capitalization, you’ll need to perform a realistic assessment of both your startup and working capital needs.  Here's a simple (note, I didn’t necessarily say easy) three-step process for you to follow:

 

STEP 1: STARTUP COSTS

There is an important distinction between startup costs and working capital. Startup costs are the upfront expenses you'll be out of pocket to set up your business and to be in a position to accept sales. Think in terms of your space, registering your business, hiring and training your team, product development, intellectual property needs, inventory requirements, just to name a few. I run a three-hour bootcamp on this topic alone, but some key tips to keep in mind are these:

  • Don't forget to account for taxes, duties, exchange rates and any associated freight/shipping charges.

  • Don't bank on friends and family to help with leasehold improvements. Labour costs can come at a premium. Be sure to budget for professionals, at fair market value, to come in and do the work.

  • It doesn't hurt include estimates for all major expenditures. This convinces lenders (and judges) that you've done your due-diligence; an important hallmark of every successful entrepreneur.

 

STEP 2: WORKING CAPITAL REQUIREMENTS

Until your business is in a position to cover its expenses, through the income it generates (the breakeven point), you'll need to ensure you have reserves from which you can draw from to pay the monthly expenses. Otherwise known as working capital needs. To arrive at this number, you'll have to prepare a cashflow projection.

 

Using the Cashflow Canvas Template, enter your revenue streams, price-points, cost of goods, and operating expenses. This is an exercise you'll want to take your time with and apply the necessary due diligence required. Make sure you're able to defend your revenue assumptions and pricing strategy. And as with startup costs, be sure to account for the details in your operating expenses.

 

Once you feel confident in your numbers, scroll to the bottom line, the Cumulative Cash Position. It represents how much money is in your bank account. Don't worry. Be prepared to see a deficit, this is to be expected. It is extremely rare for a business to turn a profit in the early stages. At what point is your bank account at its lowest? This number, my friend, represents your working capital requirement.

 

 

STEP 3: DEBT SERVICING

The third and final step in determining your capital requirements is to account for any interest the business may incur as a result of the loan(s) it secures.

 

As a simple example, if your Startup Costs are $100,000 and Working Capital needs are $100,000, you'll be looking for a loan of $200,000. However, if you're securing a $200,000 loan over five years at 10%, you could be paying $54,964.54 in interest alone. You may want to consider accounting for these interest costs in your initial ask.

 

Good luck! I love getting your updates. Keep 'em coming.

 

 

 

 

 

 

 

Taunya Woods Richardson

Creator and Chair, Nail the Numbers

Founder, Epifany Financial Group

306.713.8321

 

 

 

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