It's certainly possible to start a business with no initial money but it's a big challenge. Whether you have funding to begin or not one of the most critical elements of your business is how you forecast and control your cashflow. The first step is to build a business model to establish how cash much you will need. Your business model should include a month by month projection of your predicted sales and all related costs. You need to make sure you have thought of all possible costs that you could incur. And you need to include enough money to make sure you can live. In your business model you should have calculated how much it will cost you to start your business and how much you will need to cover your early start-up phase. Never underestimate the amount of money you will need to start your business and always make sure you're covered for slower sales and higher or unexpected costs. Many entrepreneurs kid themselves that they are building a business when in fact they are putting all their time in for free and borrowing money from their own bank accounts and credit cards to fund the business. If you're going to do this, be honest with yourself and be realistic about how long it can last. Running out of money is one of the most common reasons for businesses failing. With a little forward planning you can make sure that you don't end up as one of them. Of course some people have created successful businesses from this type of start but many more have lost their business and ended up with large personal losses and debts. You also need to be aware that if your business is struggling then you could get into serious trouble if you start repaying debts to yourself before you repay other suppliers. This can lead to criminal charges, so be warned. To begin your business you will need some basic start-up costs. This may include building a website, setting up a company, opening a bank account, buying some basic equipment like a PC, software, a printer, phone and internet access. You also want to consider the costs of marketing, promotion and travel.You may also have extra costs if you are setting up an office. In the early stages of your business it is most likely you will be making a loss each month until you have reached a reasonable level of sales. An ideal business would be profitable from day one but in reality most are not. If you have a business model that says you are profitable from day one, you may want to pinch yourself and look at it again. It's most likely that you've made some overly optimistic assumptions and missed out some significant costs. Or perhaps you've assumed that you would begin selling on day one into a cold market where no-one has heard of you. Just take off your wishing hat and take another look with a little more realism. When you look at your business model, you can use the monthly loss as an indicator of how much cash you will need. You need to keep adding up the monthly loss until the point at which you start to make a profit. This gives you a pointer towards the amount of cash that you need to fund the running of your business. So if your initial plan showed you losing $50k, $40k, $30k, $20k and $10k in the months before your model became profitable then your initial cash funding requirement would be $150k. However, because of the way most businesses run this won't actually represent your real cashflow each month. In reality it will probably take at least 30 days to collect payments from your customers and you may have to pay your suppliers in advance. Many suppliers want advance payments from start-up companies to reduce their own risk of not being paid. To get a better feel for the amount of cash you need for running the business it is best to calculate the total of the last two months' worth of sales before your business becomes profitable and then add that amount to the total cash that you originally calculated that you need. Let's say that in the last two months of the example shown above you sold $60k and $80k respectively, this means you need to add another $140k to the cash funding you need as it's very unlikely you will collect that money until two months after you've made the sales. This gives you a minimum cash requirement of $290k. This is a more realistic view of the cash you need, assuming everything goes to plan. Next calculate your start up costs and add these to the total, if you haven't already included them, and you'll have the minimum amount of financing that you need for your business. We say this is the minimum because the experience of most businesses is that they spend twice as much on costs as planned and take three times as long to hit their sales targets. Try changing your business model to reflect this and see how much cash you need then. It can often show you needing at least three times as much as you originally planned. You may need to rethink your business plans following this exercise. When you've done all this you should also add an extra amount (at least 5 -10%) for the unexpected (we usually call this a contingency plan). This total should be your real target for financing. The reason you go through this process, and any business owner should be doing this regularly, is to determine your real cashflow needs. Cashflow is the lifeblood of your business and you must have an understanding of how it works. Many businesses go bankrupt because the owners were looking at their profits and when they saw they were profitable they believed everything was alright but their cashflow caught them out. Equally many businesses have closed down or sold out due to simply not understanding the timings of cash flows in and out of their business when there wasn't even a major problem. I'll repeat it again because it's so important. Cashflow is the lifeblood of your business. Create a business model today and use it to plan your cashflow needs for the next year, no matter whether you're just starting up or you're already running a business. It could make the difference between success and total failure. |
