When a small business owner opens their business one of the most daunting questions they ask is how much capital should I invest? There is not a one-size-fits-all number that applies to every business. It can be tricky to figure out the number but it is critical to know so that your business is successful. You will need that number to create a business plan, apply for a loan, and plan for success. Here, we will discuss how much money you should invest in your business.
Estimate Your One-Time Startup Costs
First thing you should do is come up with a list of things you will need that will be one-time hits. Will you need office furniture? What kind of equipment or supplies will you need? The best way to figure out what your startup costs are going to be is to talk to someone who is an owner in the business and ask them questions. Pick their brain and ask to get advice from someone who has the experience. Ask them specifics about the reality of startup costs and revenues that they experience starting out.
Estimate Your Working Capital
You will need to figure out how much working capital it takes to keep the business running. From rent to utilities, what kind of money will you need to pay your monthly expenses. Come up with a line-item list of things you will need to pay for, like payroll, taxes, cell phone bills, rent utilities, and money to market your business.
You can always as for help if you need it by asking an accountant or business consultant to help you create this list. Do your research before you start your business which can save you a lot of headaches and money down the road.
Figure Out a Six-Month Cushion
You need money to keep your business afloat, but you will be dedicating a lot of time to your new business and revenue will start off slow. You will want to plan ahead and give yourself enough money to cover your personal expenses for at least six months. This way, you will not be stressed about making a certain amount of money to survive.
This is a good time to get familiar with those key metrics that you need to keep your eye on to stay on top of your finances.
Do Not Forget Fees
There are a lot of fees that small business owners do not think about. Common fees that many overlook include:
- Closing costs: if you are getting a loan, remember to factor in closing costs.
- Legal fees: whether you hire a lawyer to draw up LLC paperwork or consult with an attorney to hire employees, legal fees can add up.
- Bank set up fees: some bank accounts come with fees or balance minimums.
- Accounting fees: whether you consult with an accountant to set up payroll or purchase accounting software, you will want to factor in the cost.
Add a Little Extra for the Unexpected
At some point during the launch of your business, you will think of a fee or an expense that you did not plan for. Or a few months into the launch of your business, something unexpected can happen. Always have an extra line item for unexpected events. Factor it in early on so that if something bad happens you will not be forced to shut down your business.
Once you get to this part, add all the numbers together and you will know how much capital you need to start your business.