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When starting a new business, it is sometimes difficult to estimate exactly how much cash you are going to need. In many cases, we tend to underestimate what we will need to not only get the business off the ground, but to keep us in business while our products and/or services are still being developed. Here are a few suggestions for determining how much you need:
Plan on more than you think you need – the caveat to this is that the money comes cheap if borrowing. If you can secure a low-interest loan in the beginning, go for it. Cash is cheap, equity is not. Once you sell a piece of your company to an interested investor, its extremely difficult and expensive to recover it down the line.
Have measureable milestones – ask yourself how long will it take to develop and/or launch a product or expand your workforce? Find a time-measured milestone that you can use to determine how much cash it will take to accomplish. For example, if it will ake 8 to 12 months to launch a new product, calculate how much cash is needed to accomplish this for that time-frame.
Remember your operational costs – all too ofen we tend to accurately calculate how much we need to accomplish our measureable milestones, but forget how much cash we need to continue operating day-to-day during that time frame. It’s important to add a cushion of approximately 6 to 9 months of operational costs to continue running while you accomplish your goals.
Your primary objectives are to have enough money to keep your businesss running AND achieve specific milestones so you can demonstrate increased value before you need to go out again and raise additional funds.
