How much money you need to start a business

Setup costs are not enough: the money most often missing is for the first months. How to work it out.

It is not just the setup cost

When people work out how much they need to start a business, they usually add up the premises, equipment and fit-out. But the money most often missing is something else: the cash to pay the bills while the business is not yet bringing in enough.

An example with numbers

A hypothetical business with 6,000 of equipment, a 2,000 deposit and fixed costs of 1,500 a month:

• If you go two months without income and then bring in enough to cover costs, you need 11,000: the initial 8,000 plus two months of costs.
• If sales are one month later, you need 12,500.
• If, as well, income takes six months to reach its normal pace of 2,500 a month, the worst point comes in month 5 and you need 13,000.

The figure that matters is the worst point: when you have put in the most money and not yet got it back. If you do not have it, you will have to close or borrow just as you are getting started.

How to work it out for your business

1. Add up what you pay before opening: equipment, fit-out, deposits, licences, starting stock.
2. Work out your fixed costs each month, including what you need to live on if you leave your job.
3. Estimate when you will start being paid and how long it will take to reach your normal pace. Be cautious: it almost always takes longer than planned.
4. Find the month with the most money out. That is what you need.
5. Add a margin for the unexpected.

To need less

• Start with the minimum and buy or rent more once there are sales.
• Negotiate deposits and payment terms with suppliers.
• Win your first customers before opening, if your business allows it.

Work out your case, month by month, with the startup cash calculator, and then keep an eye on your cash with the cash runway calculator.

Run your own numbers