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 CostsLet'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:
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 RevenuesIt'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.
Determining Cash FlowNow 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.
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.
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? |