Calculating capital when starting your business
SMALL BUSINESS SERIES
When you are preparing to launch a business, one of the most important steps you need to take is to accurately calculate the capital needed. spoke to some experts to find out more about this process.
Running i nto a cash f low crunch is inevitable for any business, according to Ethel Nyembe, head of small enterprises at Standard Bank. To avoid this, entrepreneurs will need to dissect all their cash needs as conservatively as possible.
“It boils down to balancing the cash coming into the business with the cash f lowing out of it,” Nyembe says.
When you draft a preliminary, or pro forma, cash f low statement for the first few months, you should include a number of items (see box).
Most i mportant is the expected revenue or sales of goods and services. Once entrepreneurs have established a need in the market for a product or service, they should have a rough idea of the volume of product sold or services rendered over a specific period.
Banks, as an example of a potential funder, would l ike to see a realistic cash f low projection, according to Alan Shannon, head of small business banking professional banking sales at Nedbank.
“Entrepreneurs tend to be too optimistic in their projections of sales,” he says. “Not meeting those projections may hit the entrepreneur’s credibility. Conservatism is needed.”
The potential business person also needs to ensure that they do not chase sales without carefully considering business costs, according to Nyembe. This is easier when there is a structured plan for the new business. A cash f low statement is one such tool to provide focus for an entrepreneur.