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Startup Money
Startup Money Deciding how much money you need is now within reach because you have: Defined your
MISSION
Now comes the moment of truth creating your financial plan and deciding if you should start this business and how much money you’ll need to get started. Create your financial model; decide money to startup is needed Deciding how much startup money you'll need comes down to four questions? I’m going to list the questions and then give you ideas of how best to answer them.
The major questions for deciding startup money are: - 1. How much startup money will I bring in per month for the first year? 1. How much startup money will I bring in per month for the first year? The easiest way to calculate this amount is to list each month and using your pricing model (click here to review) calculate the amount of revenue you can expect in which months. I generally create a worst case, best case and expected amount. Let’s use DK Designs as a start. Her pricing model showed an average price of $60 - $120. So, for planning, let’s use an average sale price of $90. Now based on her Mission, one-of-kind necklaces she knows she can produce 20 necklaces a month if she has the raw materials available. She also thinks that in her best months September, October and November she’ll sell 40 necklaces a month in person and she’ll sell 30 necklaces online. So what does her model for revenue look like assuming she launches her business in June to be ready for the holiday season?
Although this is a VERY simplistic analysis it will be very useful as you continue to plan your financial requirements for your first year of business startup money. What does it tell Deanne about her startup money needs? Best case she’ll need to produce about 400 units in the first year and she’ll generate about $37,000 in cash. Furthermore, if things don’t go well she’ll need to produce 190 units and she’ll get only $17,000 in cash. From these very basic numbers she should be able to plan her raw materials purchase and her workload to make sure she has the right inventory available at the right time. Without this analysis she’s likely to produce too much inventory too early and waste much of her startup capital. If when Deanne looks at these numbers she’s unhappy because there isn’t enough revenue she has a couple of choices:
-Change her Mission to create limited addition necklaces and increase her best case sales volume
- Sell other peoples necklaces on consignment so that she increases her revenue but not her production costs Deanne should redo her planning until she gets the best case revenue numbers in the first year where she wants/needs them to be. This re-planning needs to be done before she starts the cost side of her financial model. Let’s Assume Deanne re-plans her business and decides to create limited-edition necklaces instead of one-of-kind. She has some ‘best sellers’ in mind and she is sure she can double the number of units she sells. Based on that change she re-estimates her sales volume and her startup money/revenue plan looks like this: UPDATED Revenue Model for DK Designs
Deanna is MUCH happier with these numbers and decides to move forward. She now has a much better idea of how many units to produce and she is has enough cash coming in to allow her to stay in business EVEN IN THE WORST CASE SCENARIO! She also knows how many units she NEEDS to sell per month in her peek period to make her revenue goals. The analysis was fairly easy but the information obtained will be useful in directing her activities throughout the entire year. If her sales volume isn’t what she expected she needs to analyze why. Conversely, if her sales volume is higher than expected she’ll need to produce more units to avoid being out of inventory during her peek sales month…VERY VALUABLE INFORMATION!
Now it’s your turn! Take your business and try to create a simple best case and worst case revenue model. Estimate best case based on the view of how much business you can do if everything goes as you’re hoping in it will. Estimate worst case assuming there are a lot more bumps in the road then you’re expecting. Analyze all of this information thoroughly BEFORE you start the cost plan of your financial model. Are you ‘happy’ with you revenue model? Does it produce sufficient revenue for you to stay in business? Are you comfortable the best case scenario is achievable? Is there something in your plan that if you changed it would increase your best case scenario? Should you change it and re-do your revenue model? Once you’re COMFORTABLE with your revenue model Click here to start working on your cost and profitability (Click here).
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