How to Determine Start Up Capital: What You Need to Know
This is the money that's mandatory to start a company, whether it's for permits, inventory, manufacturing, licenses, marketing, or product development.3 min read
Knowing how to determine start up capital will help a new business. This is the money that's mandatory to start a company, whether it's for permits, inventory, manufacturing, licenses, marketing, office space, or product development. This money can be from a bank as a business loan as well as from an investor, venture capitalists, or group of investors.
What is Startup Capital?
If the startup capital is from a bank loan, the company must make payments every month to pay off the debt on top of fees or interests. If it's from an investor, they will negotiate the startup capital in exchange for a specific stake in the company. Startup capital from venture capitalists or angel investors can be done in different rounds, starting with the original funding to start the business.
If the start up keeps trying to grow and develops their service or product, enough revenue might not be generated to keep up its staff or operations. This can lead to other rounds of funding, which will include multiple investors. There's usually one investor who is the lead and will have the greatest number of shares for funding during the round. This does dilute the company's control between the investors and founders but also gives larger liquidity for the startup to get their ideas closer to being ready to go on the market.
The following may require funds that aren't available to the company initially on its own:
- Professional talent
- Research expenses
- Getting any necessary hardware
Those who start backups usually invest with the hope that the companies will end up being lucrative operations that can cover any initial funding given as start up capital, but also have higher returns in the future. While the high rate of startups means many endeavors will fall and any startup capital will be lost, a few businesses do grow to scale and either go public or sell the company to a larger firm.
These are ideal situations so the investors get a large return on their investment, but it doesn't always happen. Some scenarios involve the company being valued at the funding level that was raised, which means there is no positive return for the investors.
How to Estimate Start Up Capital for Starting a Business
Correctly guessing how much capital is needed to start the company is essential because the company can fail if they run out of capital early on. When sound assumptions are used to make accurate estimates, it greatly reduces the chances of any cash shortfall. To do this, it's important to have a full strategic marketing plan. List what services or products will be offered and what the strategies are to introduce them on the market. Decide when each strategy will go into place, including what media will be used and what the advertising schedule is.
You should also consult with suppliers or vendors to get estimates of what the costs will be for product development. Ask for the exact estimates are instead of a range. A marketing budget should be prepared that includes the company's marketing tactics. Put the numbers you got from vendors next to the tasks and see what other companies tend to spend in that industry.
You'll also want the following:
- A personal budget
- Estimate for how much equipment and facilities cost
- Estimate for administrative and general expenses
- Separation of costs that will happen before the company launches from the ones that will happen on a regular basis after the launch of the company
A revenue forecast should also be completed with financial models that have assumptions for the unit sale price and volume. A spreadsheet should then be made for each month for forecast revenue up to the first three years. Calculate the expenses that are forecasted for the months and figure out how long it will take to break even. See what the cash deficit is as well. You'll also need to add up the total startup capital, including any capital that's needed before the launch and capital that's needed for the cash deficit funding.
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