How to Determine Your Start Up Business Capital Requirements

Anyone who has ever wanted to start her own business realizes that the biggest limitation is not having enough start-up business capital. Start-up capital is the funds a business owner will need to finance the production of a good and the sale of that good until the business reaches a break-even point. Over half of all business fail within the first two years of operation, mainly due to the lack of capital to keep them running. Every business will need capital in order to start or to finance it during its formative years. Successful business owners must be able to realistically estimate the capital they will need to run their businesses. If this estimate is low, then the business is doomed to fail due to lack of funds.

Create a Budget

The first step in determining the amount of capital you need to start a business is to create a budget. The budget should include all expenses and income. Expenses should include recurring costs, such as those for a monthly lease, electricity, payroll and taxes. Do not forget to include one-time expenses, which might include fees for business licenses, incorporation costs and a building sign. Completing a budget is the most challenging part of starting a business because owners might underestimate the costs or fail to budget for other costs that they did not know would exist. It is possible to arrange all expenses using a spreadsheet to capture the costs. This spreadsheet should include sections for initial start-up costs, fixed costs and variable costs.

Initial Start-up Costs

These costs cover items to get the business started. This includes business licenses and permits, office supplies, and marketing. Marketing will include business cards, letterhead, flyers and newspaper ads. These costs are mandatory.

Fixed Costs

Fixed costs are costs that you will incur in the operation of your business whether or not you are creating a profit. These costs will include insurance, loan payments, lease or rent payments, association dues, equipment and inventory and owner income.

Variable Costs

Variable costs can vary substantially from month to month and are based on usage. These costs include advertising, delivery and shipping charges, utilities and employee wages.

Critical or Optional Expenses

Once the budget is completed, it is necessary to review all expenses to determine if they are critical to the success of the company or can become optional. Any capital that a business owner receives should at least cover all essential costs. The best scenario is to have funds that will also cover optional expenses. All estimates should include an additional reserve amount. This will cover unanticipated costs.

Determining Capital Requirements

The reason for creating a budget is to determine the total dollar amount of capital you will need to operate your business until the business is able to create positive cash flow. Once you have estimated the amount of capital that is needed, you can determine how much and what type of financing you can use to generate the necessary capital. Having the right amount of capital can be the difference in a start-up company's succeeding or failing.

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