Are you ready to start your own business (Part 1/3), do you have enough cash?
Updated: Oct 29, 2019
One of the first critical questions before deciding to start your own business is, of course, do you have enough cash? Sounds like an obvious point, however running out of money is the number one reason your business could fail. Of the vast number of small businesses that fail each year in the US, nearly half (47%) of entrepreneurs state a lack of funding , cash on hand, or working capital was to blame.
Understand the total amounts of cash you will need. There can be a misconception that the cash needed for the startup is only the initial build out of the office, business supplies, and advertising. It can be incorrectly assumed that future sales will be able to pay for the future liabilities. Typically the startup capital is only the beginning of the true, total cash requirements. The heaviest cost burdens will likely be the recurring monthly costs like rent, salary, and employee health insurance that cause losses during your start up phase and slow seasonal periods. To manage this you'll need to have answers to some critical questions including what is your cash "burn rate?” i.e. how much money you will lose each month until revenue exceeds costs and the losses stop. Ideally you should have 12 to 24 months of emergency cash on hand to cover the burn rate.
What is your monthly break even sales revenue target? I.e. What revenue yields a zero monthly loss. Keep an eye on this at all times. Understand payroll taxes, health insurance and don't forget to have a reserve of cash to pay taxes on any profits at the end of the year.
Planning is essential. Create a budget that itemizes every revenue and cost line from large to small. Note that revenue estimates are typically just that, "estimates". They are not guaranteed, and you should have variations in the projections that include "Overachieve" (120 percent of Targeted Sales), "On target" (100 percent of Targeted Sales) , and "under achieve" (80 percent of Targeted Sales). These will allow you to model what would happen to your monthly cash flow based on different scenarios and revenue results.
Typically the startup capital is only the beginning of the true, total cash requirements. The heaviest cost burdens will likely be the recurring monthly costs like rent, salary, and employee health insurance that cause losses during your start up phase and slow seasonal periods.
Should I pay myself a salary? How much? Your business plan's start up cash will need to factor in your personal living expenses each month until the business becomes cash flow positive. With this in mind, your salary can be either paid through the business or kept at zero. It needs to be as low as possible to reduce the "burn rate" mentioned earlier. When we are speaking about the "total" start up costs, this reduced or "forgone salary" during the first year can be the largest seemingly hidden expense.
What about business loans? Good to have, but be careful, hopefully you won't need them in the beginning. They create an added level of stress and the risk of default. As your business scales, these become a strategic advantage, however for small businesses simply getting "another loan" should definitely NOT be your survival strategy.
Want a business hack to all of this ? Hint: ... find a way to get clients signed before you even launch. For more advice, support and information on ways we can help, contact us - Curtis Mackenzie - MD New Frame KK www.newframe.jp