Video: Module 8 – How Much Financing do I Need?
Presenter: Andrew Earnshaw
One of the hardest things to do when a person is starting a business is determining how much financing or how much money in general I really need to get this business off the ground.
It's usually not too difficult to do the research, come up with a list of things that you need to purchase when you first start the business, and those are your initial start up costs in terms of the equipment you might need or inventory to get going, that kind of thing. At that point a lot of folks sometimes stop, and that's a mistake. Figuring out how much you really need is a little more complicated than that. We'll turn now to a tool called cash flow to come up with a better analysis.
The best way to think about cash flow is using a computer. You'll find in your business plan materials that you probably got some paper cash flows that have blanks you can fill in. You can use your calculator to add up how much cash comes in in a given period, how much goes out. They're a good start, but the problem with them is that they're really hard to change the numbers in there. The best way to do this is using a software on a computer called a spreadsheet, and the most popular one is one called Microsoft Excel.
So here as you can see we have an example cash flow. This is one we just made up, a start up business for its first three months. Sales are going to start kind of low and build over the first three months. The first thing you'll notice is that sales, particularly in the first couple of months, are not enough to cover all the expenses. So we learn the first thing from our cash flow is that we didn't have enough money to start this business, simply by buying all the things that we need. We needed a buffer, we needed some operating capital to actually survive the first few months in the case of most businesses the first couple of years of a business and the cash flow helped us determine how much operating capital we were going to need.
The second thing you can see is now, let's take a look at, okay, we guessed we had a pretty good guess of how much our sales were going to be. But what if our sales are only 60 per cent of what we thought they were going to be? So we can go and change that in the computer. So in summary, you can see how useful the computer is for doing this kind of analysis. If you don't have access to software like this, go into a local business development centre, get one of the business counsellors to help you come up with a cash flow for your business. And as you do your business plan research, go back to it many times, change the numbers, put in new stuff, ask yourself what if expenses are going to be a little higher than I thought they were going to be? How much cash do I need to really start this business, not only for those start up costs, but also for operating capital and to survive in the beginning stages.