How Much Will You Need?
It’s important to be realistic about this big question. Try a number of different scenarios including some very pessimistic ones. The greater the variety of scenarios you look at, the more prepared you will be to react quickly if things don’t turn out as expected.
How to Calculate How Much You will Need
Part 1: Add up your start up costs
Part 2: Add how much you need to cover shortfalls in your cash flow
Part 3: Subtract your initial investment (money from you, your family or partners)
This will give you the amount you need.
Part 1: Calculating Your Start-Up Costs
Total your start-up expenses, including:
- Rent deposits and leasehold improvements
- Licenses and permits
- Down payments on equipment and vehicles
- Employee recruitment and training
- Initial inventory
- Marketing materials and advertising.
Part 2: Calculating Your Cash Flow Needs
You may expect income from sales during your initial months, but it pays to be conservative in your estimates. The reality is that you will need money to pay for expenses such as rent, utilities, wages and inventory for the first few months while you wait for sales to turn into cash. These are cash flow costs – and you must be prepared to cover them.
Begin by estimating your sales and how long it will take customers to pay. Businesses rarely collect on their receivables immediately. Many companies must wait 30, 60 or 90 days for payment.
The more you can do to turn sales into cash in the operation of your business, the less you will have to borrow.
A cash flow forecast shows how much money you will need to pay your bills each month. For each month, the forecast shows:
- Expected sales
- Expected cash inflow (as accounts receivables turn into cash)
- Cash already on hand
And subtracts:
- Actual cash expenses (rent, utilities, wages, inventory and others)
- Purchase or lease charges for equipment.
When your total cash flow is below zero, you will need to borrow. Many companies set a slightly higher figure than zero because to have cash on hand for emergencies.
Solutions For Cash Needs
Cash flow is vital to every company’s ability to operate. Don’t guess at your cash flow needs. Your RBC small business advisor can help you make sure that you have put together an accurate forecast. And our advice is free.
Your RBC small business advisor can suggest Royal Business financial products or services to meet your cash flow needs:
Overdraft protection: Covers up to $5,000. And there’s no setup fee if you apply online or by phone.
Line of credit: For larger amounts, RBC’s Operating Line can supplement your day-to-day cash flow for a low monthly fee.
Credit cards: The RBC Royal Bank® Visa* CreditLine For Small Business™ can be used for large purchases or everyday business expenses.
Part 3: Achieving Breakeven
Breakeven is the point at which your company’s cash on hand from sales covers your monthly fixed and variable costs. Once you reach breakeven, your company is financing itself.
Although you don’t have to borrow anymore to finance ongoing operations, you may still need temporary funding in future months or years due to expansion.
It’s tempting to predict an early breakeven point, but don’t overestimate your ability to sell and collect.
Tips to Avoid a Cash Shortfall
Cash shortfalls happen when either sales or collection of receivables get too slow. There are plenty of things a business owner can do to turn inventory into sales and sales into cash as quickly as possible. Try these proven cash flow muscle-builders.
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