How Much Money Do You Need-and Why?

     

How Much Money Do You Need ”and 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.

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

First you need to establish why you need this funding ”because the why will sometimes determine the who (to ask for money). 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 profits ”which 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).

Use the following checklist to help figure out your funding needs.

Funding Calculation Checklist

Estimate your startup and day-to-day costs for the first 12 months of operation

Project your sales revenue for the first 12 months of operation

Use your cost and revenue numbers to calculate your cash flow for the first 12 months of operation

Estimating Costs

Let's start on the costs side of things. Just what do you need to buy 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 sheet. These categories include:

• Capital expenses. These are the big one-time purchases you need to make just to get started. Examples include personal computers, printers, digital cameras , scanners , office furniture, and similar expensive pieces of equipment. Lower-cost equipment, such as postal scales , typically don't fall into this category. You should enter the total expense for each item in the month you plan to purchase it.

• Rent and utilities. For most small eBay sellers, you operate out of your home, so you have no additional space expenses. However, if you need to rent a storage bin or warehouse space, or plan to lease office space, then you should include those expenses here. This is also where you track the fixed monthly costs of your Internet service, auction management tools, and the like. Do not include any rent or utility expenses (for your house) that are already being paid; only include 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 about 10% 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 items ”paper, 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 if you're making the items you intend to sell.

You should plan out your costs in each category on a month-by-month basis, for at least twelve months. Adapt the following worksheet for your own individual circumstances, and for the particular items you intend to sell. (If you're spreadsheet savvy, you may even want to plug it into Excel. )

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	___	___	___	___	___	___	___	___	___	___	___	___	___

Now you know how much money you'll need every month for the next twelve months. This is not how much cash you actually need, however; after the first month or so, your ongoing revenues should help cover these costs ”as you'll discover as we continue working through this process.

caution

You shouldn't plan on hitting your stride right out of the gate. It's reasonable to expect it to take a few months for your sales 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 overestimate the time it takes a 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, "Step One: Create a Business Plan."

Use the following worksheet to detail your projected sales over a twelve-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; all it is is 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, then subtracting your cash expenses for the month. The resulting number is your cash position at the end of the month ”which becomes your starting cash on hand for the next month.

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.

If your cash position at the end of the month is a negative number, your outflow 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 month ”which you can use to pay next month's bills, put in your savings account, or go out and buy something nice for yourself.

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 growing ”and 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 anal, 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.

Cash Flow Worksheet: Mike's Gift Baskets

Month	1	2	3	4	5	6	7	8	9	10	11	12
Cash on Hand	$0	(2950)	(2600)	(1950)	(1000)	$275	$1550	$2825	$4100	$5375	$6650	$7925
Total Sales	$1000	$1500	$2000	$2500	$3000	$3000	$3000	$3000	$3000	$3000	$3000	$3000
Capital Expenses	$3000	$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	$3950	$1150	$1350	$1550	$1725	$1725	$1725	$1725	$1725	$1725	$1725	$1725
Cash Position	(2950)	(2600)	(1950)	(1000)	$275	$1550	$2825	$4100	$5375	$6650	$7925	$9200

If you look to the end of the twelfth 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 hole ”and 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.

caution

If you have to borrow money just to pay your rent or mortgage, then 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.

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

So how much additional 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.

In our example, the biggest negative cash position comes in the first month. That number ”$2,950 ”is 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?