Now that you have determined the scope of your business and a good name, it is time to figure out the money side of the startup.  The number one reason for business failure is lack of planning with regard to the financial side of the business.  The big ten dollar word for this is Undercapitalization.  It means that you don’t have access to enough capital to operate the business.

Even a business that is fantastic at selling a high end product at a profit can fail if they don’t have enough money.  Often there is a lag between when you have to spend money and when you get paid.  So, you need to have enough money in the bank so that you can make it until the cash starts rolling in.

A True Story about Cashflow…

My father started a small business in our basement when I was fifteen and I remember him and his two partners (one an Engineer, the other a Marketing guy) working 18 hours a day on their pneumatic conveying systems, airlocks, and other mechanical components.  The name of the company was BulkVeyor Inc.  They struggled and they started to have some success, this was at the heart of the Carter years with stagflation and the country basically in a deep funk.

The business was doing ok, but cashflow was always a problem… I remember many nights when our family of five plus the two partners would eat the frozen “chicken” pot pies for dinner… and I still can’t eat them to this day, I am talking about the two for a buck ones, I equate these to deprivation and poverty thinking, but I digress…

The Death of Three Salesmen…

What finally killed their fledgling three year old company was a huge order,  they had made it!  They worked day and night to get the designs, they took the order, and they were so excited.  The terms that they agreed upon were a certain amount down and the remainder to be paid when the equipment was delivered, and they started designing and building the system…

They ran out of down payment when they were about 75% complete and they went to try and find the additional money that they needed from the bank to finish the job.  They had everything tied up in a system that was 75% done, and needed to be 100% done so that they could get paid…  The bank looked at their situation and wouldn’t give them more money, so they went to the customer.  The customer wouldn’t budge on the payment terms and they were finished.   This finished off their company taking an order larger than they could fund…

Calculate Startup Costs…

You need first to figure out what things you will need to startup.  Be realistic, but keep it simple.  You need a place to work, you need some supplies and tools like computers etc, you might need employees, you need to have a very good picture in mind of what is needed to get started.  You also need to be aware the customers need to be attracted and this marketing can cost money as well, you can use manual labor to attract some business but you need to budget for some marketing to spread the word.

Once you have these numbers figured out, it is time to move on to Step 3. Forecasting Revenue and Operating Costs…