How much capital do I need to start a business?

It is almost impossible to say exactly how much capital you will need to start your business as this can vary greatly depending on a range of factors, including location, current and projected economic climate, products or services you are offering, etc.

However, there are still some early measures you can take to get a better idea of how much you might need to spend. Analysing your financial picture carefully is crucial to ensure that you do not underestimate your capital requirements and end up having to close your business due to lack of funding.

Here are some key pointers to consider when identifying your financial requirements.

Prepare a list of all cost items

The saying ‘you need money to make money’ is often very true, and at the beginning you are likely to incur a number of expenses before you see your first month of profit.

Prepare a ‘Budget’

You must distinguish between living expenses and start-up costs. It is critical to determine from the beginning just how much money you are willing and able to set aside to get your business started.

Your budget should cover 12 to 24 months of business operation. It should include four very important figures:

• Projected sales and revenue

• Projected total costs of achieving that level of sales and revenue

• Profit and loss

• Cumulative total of profits and losses over time

You should compare the actual results in each category against the projected results, which should help performance.

Now you know exactly how much your living expenses come to, maybe you could consider scaling down your living expenses somewhat during the start up of your business.

Ideally, you should plan to set aside around 6 months worth of living expenses as a cushion to fall back on during tough times.

Do a break-even analysis

You need to try to determine when your business is likely to break even. Basically, this is the point at which you neither lose nor make money, where your gross profits are equal to your fixed costs. A realistic timescale would be approximately 6 to 12 months for many businesses.

This is an effective way to determine how many products you need to sell, or how many services you need to provide, in order to stay in business.

Where can you get capital?

The best place to start is your own pocket. However, this is not always realistic and, fortunately, there are many other methods you could use to finance your company:

• Business Loan through your bank or another FSA recognised lender.

• Bank overdraft facility – this is probably one of the easiest methods of acquiring finances for your business and usually comes as standard with a business bank account. However, you may need to shop around in order to find one that offers a competitive interest rate, or else you could end up paying over the odds.

• Credit Card – an alternative method of obtaining credit to help start up your business. Once again it is very important to shop around to find a credit card that offers competitive interest rates so that you get the best value.

• Go into business with a partner who may be able to supply you with the additional investment you require.

• Apply for a Government grant. This could depend on eligibility and geographical location e.g. if your company is located in an area that is undergoing economical regeneration, you may be eligible for new funds.

• Private investors – this may require pitching your idea to a panel of venture capitalists such as “Angel Investors”. However, this also means that you will probably need to sacrifice a portion of your business to obtain the investment.

Many entrepreneurs, even with a good product or service fail in their business attempts because they underestimate their capital requirements. Plan appropriately and consider every factor in great detail, and sufficient research will help you succeed. Remember your reason for pursuing a business idea is to make money.