[ADV] Startup Capital: How Much Is Enough?

One of the most thought-of aspects in starting your own business is the capital. In our previous article Fuel up, Rev Up and Get Your Business Roaring, we gave you a rundown of the funding options that may help you fuel up your business. Here’s a summary:

1. Bootstrap Financing
2. The 3 Fs (friends, fools and family)
3. Financial Houses and Bank Loans
4. Venture Capitalists & Private Investors
5. Business Grants from Government
6. A funding competition like ideas.inc. Business Challenge 

It is important to know how to compute the amount of money you need as capital to get the business running. And no, we don’t mean just approximating. We mean using a certain formula that could be applied in all sorts of enterprise.

First, it is imperative to determine which type of company you would be putting up because that will give you a rough idea of how big you should raise. It could either be a product company, a service company, an advice company or a combination of all these. A product company such as a manufacturer of a certain gadget will have to shell out a hefty amount of money in advance to cover the production costs before you can expect your first receipt. A service company like housekeeping services may not need too much upfront money. You buy supplies, work on the human capital, and then collect cheques monthly. An advice company such as a law firm or consultancy capitalises on specialised services therefore allowing them to even require advance payment.

Second, the amount of capital needed varies from industry to industry. Determining how much is enough will require a feasibility study but one thing is for sure. The absolute minimum that you need to start with is the amount of money required for fees so learn about the permits and certifications to be secured. Prepare yourself for the pre-operation expenses and the monthly operational expenses.

Third, know the importance of the working capital. The working capital determines the company’s strength and current status. Say if a company uses its short term resources to pay off all of its short term liabilities, what would be left of the company? The more working capital a company has the less financial strain and the more stable it gets. This determines a company’s capability to expand and grow.

How do you calculate your working capital? Here’s a simple formula:

Current Assets – Current Liabilities = Working Capital

Knowing your working capital and having enough of it gives you security that whatever unexpected circumstance should arise, you are still covered. The purpose of knowing what your working capital is to be able to forecast returns and avoid financial pressure.

Whichever funding choice you wish to apply for, be sure that you have a business plan that works. It has to be specific on the budget so as not to put your company into a hard position where you either have less than what you need or you borrowed too much. If you need expert advice on the steps you need to take and things you must know (like the permits and fees per se), we strongly suggest you attend workshops.

Ideas.inc. Business Challenge 2011 is now actively looking for young entrepreneurs who want to take the plunge into the entrepreneurial scene. Not only do we grant funding, we also deliver workshops and mentorship to gear you with the important things you need to know about starting up. Visit ideas.inc. Business Challenge for more details.

Ideas.Inc. Business Challenge 2010 is an advertising partner of Young Upstarts.