Securing funding for your small business is easier than ever with 30-second online funding applications, but it can be a challenge to determine exactly what your business financing needs are. While some home-based businesses can get off the ground with as little as $3,000, more capital-heavy businesses can require up to $50,000. So how do you determine how much you need?
Look at a Year-Long Balance Sheet
Your business’s financing needs will differ depending on:
- The business type
- Operating cycle
- Stage of growth.
Some businesses need a larger cash-on-hand amount because they have a long operating cycle or carry large amounts of inventory. Consequently, your expenditures may exceed your revenue in certain months if you rely upon seasonal sales to put you in the black.
Similarly, a new or recovering business often requires more capital than an existing one that is looking to expand.
It’s better to calculate your business’s financial needs over the course of an entire year, rather than a single month.
Startup Business Financing Needs
Determining the correct amount of capital for your business depends on accurately predicting your expenses and income over the coming months.
Around 20% of new businesses close within the first year. Going the distance requires securing stable funding that allows you time to focus on other parts of growing your business, like training staff and securing a loyal customer base
The Small Business Administration estimates that most small businesses incur between $2,000 and $5,000 in one-time starting costs, over and above normal operating costs. These can include:
- Office furniture or equipment
- Incorporation fees
- Purchasing premises
- Designing a website
Your business might need extra cash to cover these expenses.
Developing detailed financial projections is key to borrowing the correct amount of money for your business. In established businesses, this is found by reviewing your past financials. In the case of a new business, there’s no past history to draw upon.
Existing Business Financing Needs
Existing businesses need additional financing to weather unexpected crises, expand their businesses, or handle extra expenses.
Growth or Recovery?
To determine how much you need, you can ask what phase your business is in. Financing an expansion or other investment in your business requires a financial projection like those used by startups. You should have a plan for when the expansion will yield added revenue.
You can also secure financing for ongoing operations to help your business recover from a setback. You should also plan to bolster your cash-on-hand in case of smaller unforeseen expenses.
For existing businesses, it’s crucial to base your future financial goals on your past experiences. Plan your future expenses based on what they have been in the past, so you don’t run the risk of underestimating the needed financing.
Good planning is central to your business’s financial future. Having a solid idea of your business financing needs over the course of an annual business cycle will help you determine the correct amount of financing you need.