One reason for the failure of many small businesses is that they are undercapitalized. Here are some tips to help determine how much money you will actually need to start and to run your business.
Plan, plan, plan.
Plan every aspect of your business in as much detail as possible.
Assess your target market.
Analyze your target market, their needs, how your product or service will fulfill those needs, your unique selling proposition, and how you’ll reach them. Determine market size and what share you can realistically capture.
Identify all business costs.
Go through every section of your business plan and identify all costs. Request specific quotes from suppliers or use industry benchmarks. Talk to industry experts, associations, suppliers, or complementary businesses for input.
Assess your pricing strategy.
Ensure that your suggested prices cover your costs (both fixed and variable) and provide a reasonable margin. Your prices need to be competitive, but you don’t want to compete solely on price because that strategy is not sustainable. It’s much easier to lower your prices than to raise them.
Double your expenses and cut your sales projections in half.
Most potential entrepreneurs tend to be overly optimistic about their sales projections, and tend to underestimate the true cost of starting their business. Adjust your figures accordingly to provide a “worst-case” scenario to ensure you have enough funding to survive.
Don’t undercapitalize your business.
One reason so many new businesses fail is that they don’t start with enough operating capital. Have enough personal savings or use term loans to fund your major capital expenses, and use a line of credit to cover inventory and day-to-day operating expenses. Save your credit cards for emergency expenses only.
Don’t borrow more than you have to.
Find and rely on your own sources of funds as much as possible. Build up your savings in advance, ask family and friends for assistance (either funds or “in-kind” help), find partners or investors, or sell personal assets.
Don’t jump into the deep end.
Do you really need to start your business in a “big” way or can you scale back to a more realistic starting point, and build up your business gradually? Don’t try to be everything to everyone.