Working capital for your startup

Making careful working capital calculations when starting a business is critically important. Without knowing how much money you need to run your business on a daily basis and how long it may take to reach breakeven, you can quickly find yourself in a cash flow crisis.

Follow these steps to make sure you have enough money to stay in business:

 

Learn about your industry

From the beginning, you need to know two things: how much a business in your industry typically spends to open its doors, and how long it will likely take the business to become profitable. To find this information, seek out statistics for your industry through trade associations and other industry sources. If you're opening a restaurant, for instance, call the restaurant association in your town or state, which may have data it can share.

Another good source is the Australian Chamber of Commerce and Industry (ACCI), a national council of business organisations that produces various economic surveys, public policy analysis and other issue-specific reports that your business can utilise. State or federal government agencies such as Business.gov.au or the Australian Bureau of Statistics may also be good sources of statistics on business startups. 

Network, network, network

There's only one place to get the real lowdown on business costs: from other business owners. Join local industry associations and befriend business owners of similar business types. Try to get answers to questions such as:

  • What costs took them by surprise when they first opened?
  • What were their biggest costs?
  • How did they keep costs down in those early months?
  • How long did it take to break even?
  • What were the most cost-effective ways of marketing the business?
  • How many employees are needed?
  • What is the going pay rate?

Don't forget to ask about revenue as well - you need to know how much money the business will likely bring in during those early months. If local business owners in your sector view you as competition and clam up, try chatting up an owner of a business that's similar to yours but located in another town.

If business owners won't give you details about their own businesses, ask if they are willing to give you a blank financial statement, with all the numbers removed. This will at least show you all of the expense categories you need to think about.

New business owners are often unaware of the full range of expenses they'll have, such as the cost of workers' compensation insurance, unemployment payments, required licensing fees, business taxes, and association dues. Having the blank statement will help prevent surprise costs that aren't in your working capital budget.

Talk to experts

Business owners provide excellent firsthand knowledge of working capital needs and day-to-day running of the business, but good consultants, accountants, and lawyers offer broad expertise you won't find elsewhere.
As your business grows, these advisors will become increasingly important; so if you can connect with a few strong advisors early on, all the better.

Consider economic conditions

If the economy is slow in your market, plan on additional working capital reserves beyond what experts and business owners tell you that you need. If other owners started in boom times, remember that your situation will be different. Keep in mind that the current economic climate is generally uncertain, so it pays to be prepared for any financial roadblocks.

Find the money

One thing to remember about working capital is that you don't have to have it all in cash, all at once. Once you've come up with your working capital estimate, just make sure you will have access to the cash you need while you get your business off of the ground. If you can open a bank line of credit, you'll have money you can tap as you need it. For more information, read this article  on what to consider before applying for a loan.

Besides banks, consider other possible sources of capital, such as venture capital firms, angel investors or even family and friends, although as with any business venture, you should be aware of the risks involved.

By Carol Tice of AllBusiness.com

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