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Making things requires factories and workers and other expensive inconveniences. You can't multiply your investment 100 times with that sort of financial burden.
Michael LewisSlate magazine

Finance

How much do you need?

There are three separate requirements here. You need to have enough money to cover:
  • The initial investment to get the business started
  • The on-going operating cash requirement until the business becomes self-sufficient
  • Your own personal expenses, until the business can afford to pay you a salary.

Most people only calculate the first, forgetting about the other two until it is too late.

The initial investment is the total of all the expenses that you are going to incur in establishing your business. It will include any expenses in forming your business, the purchase cost or initial rent and deposit on premises, machinery to produce, office equipment, furniture, stationery, perhaps even advertising and promotion to announce the opening of your business.

Start by making a “wish list”. Detail all the equipment, machinery, costs that you would like to start your business with. Then go back and cut out those that are “nice to have” but not essential. What’s essential forms the basis of your initial investment.

Download these spreadsheets to help you in your calculations:

Next you need to look at your on-going operating cash requirement. This will come from your Operating Budget and Cash Flow calculations. Here, you are allowing for all the expenses that you will have to bear before you see money coming into your business, sufficient to make it self-reliant.

For example, if you agree to make a table for a customer, you will probably have to buy the materials and pay staff to do the work before you get paid by the customer. And the money the customer pays will probably go to buy materials for the next customer’s order.

This is why you have to allow for a period of time from start-up before your new business will be able to pay you a salary. There may be a profit in your first order, but it’s unlikely that the business will be able to pay it to you. There will be more important demands on that money.

So you need to calculate what it costs you (and your family) to live and to allow perhaps three or even six months of personal expenses in deciding on how money you need to finance your start-up.

Download this spreadsheet to help you in your calculations:

Next, know that you know (or have some idea of) how much you need, where do you get it from?