"Accurately gauging how much capital you need is crucial to success. Underestimate your needs, and you'll run out of money before the business becomes profitable. Overestimate your costs, and you'll never raise enough money to get your business off the ground." (Entrepreneur.com).
Every small business owners needs some form of cash to start up their business, but what it comes down to is how much is enough. Luckily, there is no arbitrary number I can hand you, which means everyone does not need to reach some magic number, but what that does mean is you need to do your homework and here is some food for thought.
The first thing you really need to look at is your current money situation. If you are struggling to make ends meet currently in a job, living either with family or on your own--then maybe you should keep building your business plan but continue to save before making any decisions--especially if opening a business means you are quitting your current position. If you are living somewhat comfortably then you can possibly move forward in your plan to open up for business--but be mindful of your spending.
When taking into account what your business needs, you want to look at whether your business can be run out of your already existing residence or if you will have to rent and re-purpose a space for your business. This is the largest expense you will have to take on if needed, so its best to make an initial budget with a little wiggle room for unexpected surprises if you happen to rent a fixer-upper type situation (as those can always be interesting).
The next step is to figure out all you will need in terms of materials. If you are doing consulting from your home then the basics of a computer, internet provider, phone line, and office supplies can suffice initially, but if you are opening up a cafe then on top of your business location you will need all the ingredients for your cafe (food, drinks, etc) and invest in a P.O.S system, furniture and many other supplies.
This is why I say there is no arbitrary number for how much YOU need to save, but I will get to a portion where I can give you a little bit of a base number, but later on.
The flip side to how much money you will need goes back to your business plan where you can gauge based on your expenses how much you will need to charge the customer for your products or services to make a profit. Now the idea is that none of the above stated has been bought yet and you are brainstorming based on research of all products and real estate needed. It is good to go over the numbers, formulate a goal as to how many customers you want in the door each day, and go from there.
Normally, many businesses don't start profiting right away and it can take months to truly get off the ground (which goes back to the 9 out of 10 percentage), but if you hold on then you will be able to make back your initial expenditures.
Going back to my statement about a base number I can give you how much you need to save in case you are simply going cold turkey from your job and giving 100% to your business. Most businesses when they do start out have people working the small businesses as well as a part-time job to continue to make money, but some people like the risk--which is good and bad! If you really want to be safe if you are taking a risk, then it is best to save a little over two years worth of living expenses and a years worth of expenses for your business.
This may seem like a lot, but it is worth it for the risk. Two years worth of living expenses is because of the initial time it takes to turn a profit can run from a month to a year, so you want that covered and if your business does not pan out, then you will need a years worth just to cover you while you go back into the job market. The years worth of savings for the business also offers you a back-up if business is not booming JUST yet, but you don't have to give up.
This savings plan buys you time if you want your business to succeed, but also if you cannot make a go of it (maybe your personality does not fit into the traits of a small business owner and it took opening a business to find out), or other circumstances. The point is, a small business venture should not leave you scrounging for money if it doesn't work out.
Again, there is no real way to prepare each specific small business owner with a number that works around the board, but it is good to give some ideas out there so people can work with them and come up with their own budget and business plan.
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