How Much Money Do You Needand Why?


Before you go seeking funding for your new business, you first have to determine how much money you need. This isn't as easy as it may sound.

First, you need to establish why you need this funding. That's because the why will sometimes determine the who (to ask for money).

Note

Operating expenses are the ongoing, day-to-day costs of doing businessrent, utilities, office supplies, packing supplies, and the like.


Assuming that you're starting your business from scratch, you'll need enough cash in the bank to pay for all your operating expenses until the time when you start generating real profitswhich could be a period of months or even a year or more. You'll also need cash to purchase your opening inventory, as well as any capital expenses you need to make (for computers and similar items).

Estimating Costs

Let's start on the costs side of things. Just what do you need to purchase to get your business up and running?

Your business costs fall into a handful of major categories, which you should enter into a monthly planning spreadsheet, such as the one here. You can adapt this worksheet for your own particular circumstances, and for the specific items you intend to sell. (If you're spreadsheet savvy, you may even want to plug it into Excel.) You should plan out your costs in each category on a month-by-month basis, for at least 12 months.

Need some details? Here's what these categories should include:

  • Capital expenses. These are the big one-time purchases you need to make just to get started. Capital expenses are those items that have a high cost and a long life, such as personal computers, printers, digital cameras, scanners, office furniture, and similar expensive pieces of equipment. Lower-cost equipment, such as postal scales, typically doesn't fall into this category, nor do disposable items such as boxes and shipping labels. You should enter the total expense for each item in the month you plan to purchase it.

    Cost Estimation Worksheet

    Month

     

    1

    2

    3

    4

    5

    6

    7

    8

    9

    10

    11

    12

    TOTAL

    Capital Expenses

     

    Computer

     

    Printer

     

    Furniture

    Rent and Utilities

     

    Office rent

     

    Warehouse rent

     

    Utilities

     

    Internet

    Sales Expenses

     

    eBay fees

     

    PayPal fees

     

    Shipping

    Packing Supplies

     

    Boxes

     

    Labels

     

    Other

    Office Supplies

     

    Paper

     

    Toner

     

    Other

    Inventory

     

    Item 1

     

    Item 2

     

    Item 3

    TOTAL

     


  • Operating expenses. Most small eBay sellers operate out of their homes, so you'll likely have no additional office space expenses. However, if you need to rent a storage bin or warehouse space, or plan to lease office space, you should include those expenses here. This is also where you track the fixed monthly costs of your Internet service, auction management tools, advertising and promotion, research, and the like. Do not include any rent or utility expenses (for your house) that are already being paid; include only new expenses directly related to your eBay business.

  • Sales expenses. This is where you track your eBay and PayPal fees. These are variable expenses, typically figured as a percent of your projected sales. (You can do the figuring yourself, based on the various services you sign up for; in a pinch, I've found that these expenses average between 10% and 12% of total revenues.)

  • Packing supplies. This is where you'd put that postal scale, as well as boxes, labels, sealing tape, and the like.

  • Office supplies. This category is for all your consumable office itemspaper, pens, paper clips, printer toner or ink cartridges, staples, and so on.

  • Inventory. While not an operating expense per se, this is probably the biggest ongoing expenditure for most eBay sellers. If you have to purchase the items you intend to sell, you include those inventory costs here. This is also where you put your "manufacturing" costs, such as materials and labor, if you're making the items you intend to sell.

Once you fill in the worksheet, you'll have an estimate of how much money you'll need every month for the next 12 months. This number is not how much cash you actually need, however. After the first month or so, your ongoing revenues should help cover these costsas you'll discover as we continue working through this process.

Note

You shouldn't plan on hitting your stride right out of the gate. It's reasonable to expect your sales to take a few months to ramp up to their full potential, so it's best to plan for lower sales when you're first starting out. One of the most common business mistakes is to underestimate the number of months it will take for your new business to start generating significant revenues.


Projecting Revenues

It's hard to gaze into a crystal ball and say with absolute certainty how successful you're going to be with your eBay sales. All you can do is make a reasonable guess, based on all the planning you did back in Chapter 3, "Creating a Business Plan."

Use the following worksheet to detail your projected sales over a 12-month period.

Sales Projection Worksheet

Month

1

2

3

4

5

6

7

8

9

10

11

12

TOTAL

Sales

             

Item 1

Item 2

Item 3

Item 4

Item 5

Item 6

TOTAL


Determining Cash Flow

Now that you know how much money you think you'll have going out (costs) and coming in (revenues) every month, you can calculate your monthly cash flow. This isn't your monthly profit, by the way, although it's probably close; it's just a measure of your business's cash position.

You calculate your cash flow by starting with the amount of cash you have on hand (typically the ending cash from the previous month), adding your cash sales for the month, and then subtracting your cash expenses for the month. The resulting number is your cash position at the end of the monthwhich becomes your starting cash on hand for the next month.

If your cash position at the end of the month is a negative number, your out-flow exceeds your intake and you'll need to come up with additional funds to meet the cash shortfall. If you get a positive number, you've generated extra cash that monthwhich you can use to pay next month's bills, put in your savings account, or go out and buy something nice for yourself.

Note

The breakeven point is that point in time when your expenses and your revenues become equal. Any business conducted before that point was done at a loss; any business after the breakeven point is generating an operating profit.


Use the following worksheet to calculate your monthly cash flow. Remember that the Cash on Hand number is equal to the Cash Position number from the previous month. If you're profitable, the Cash Position number will keep growingand the first month it goes positive is the month that your business breaks even.

Cash Flow Worksheet

Month

1

2

3

4

5

6

7

8

9

10

11

12

Cash on Hand

plus Total Sales

minus Total Expenses

Cash Position


Now here's the thing with cash flow: It doesn't matter how much cash you end up with at the end of the year; if you don't have the cash when you need it, you're short. That's why you need to project your cash flow on a monthly basis. (Or, if you want to get really obsessive, you can calculate it weekly; after all, your expenses build up at least that frequently.)

Let's work through a quickie example, as shown in the following worksheet.

If you look to the end of the 12th month, you can see that you're in a very good cash position. You're generating $1,275 in cash each month, and should have a total of $9,200 cash on hand. However, if you look at your very first month, you see that you end that month $2,950 in the holeand you stay in a negative cash position for the first four months of operation. It takes you until the fifth month to dig yourself out of the hole, when your cash position becomes positive.

All of which means that you need to come up with enough cash to get you through those first four months.

Cash Flow Worksheet: Mike's Gift Baskets

Month

1

2

3

4

5

6

7

8

9

10

11

12

Cash on Hand

$0

(2,950)

(2,600)

(1,950)

(1,000)

$275

$1,550

$2,825

$4,100

$5,375

$6,650

$7,925

Total Sales

$1,000

$1,500

$2000

$2,500

$3,000

$3,000

$3,000

$3,000

$3,000

$3,000

$3,000

$3,000

Capital Expenses

$3,000

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Rent & Utilities

$200

$200

$200

$200

$200

$200

$200

$200

$200

$200

$200

$200

Sales Expenses

$100

$150

$200

$250

$300

$300

$300

$300

$300

$300

$300

$300

Packing Supplies

$200

$225

$250

$275

$275

$275

$275

$275

$275

$275

$275

$275

Office Supplies

$200

$200

$200

$200

$200

$200

$200

$200

$200

$200

$200

$200

Inventory

$250

$375

$500

$625

$750

$750

$750

$750

$750

$750

$750

$750

Total Expenses

$3,950

$1,150

$1,350

$1,550

$1,725

$1,725

$1,725

$1,725

$1,725

$1,725

$1,725

$1,725

Cash Position

(2,950)

(2,600)

(1,950)

(1,000)

$275

$1,550

$2,825

$4,100

$5,375

$6,650

$7,925

$9,200


So how much initial cash do you need? All you have to do is look at the biggest monthly loss in the Cash Position line; this number represents the funding requirements for your new initiative. In essence, you want to obtain enough funding to pay for all your expenses until your business becomes self-funding through monthly operating profits. Anything above that figure is a safety net; anything less is a disaster waiting to happen.

Note

If you have to borrow money just to pay your rent or mortgage, you're in no position to be launching a major eBay business. Make sure that all your basic needs are met before you invest more money to become a high-volume eBay seller.


In our example, the biggest negative cash position comes in the first month. That number$2,950is the amount of initial funding you need to get your business up and running.

Now for the tough question: Where do you get the money?




Making a Living from Your eBay Business
Making a Living from Your eBay Business (2nd Edition)
ISBN: 0789736462
EAN: 2147483647
Year: 2004
Pages: 208

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