11 Apr STARTUP CAPITAL: Now That You Have invested All this Money, How Long Can you Operate?
Several meetings prompted this article over the last two weeks, where the parties involved had different understandings of the term “start-up capital.” It made me think that this was a subject worth discussing.
According to Investopedia, start-up capital is “the money raised by a new company to meet its initial costs.”
This is the traditional meaning of start-up capital and refers to the cost of everything needed for a business to open its doors to customers.
Depending on the nature of the company, this could include rental deposits and rent for the first month, cost of renovations or a new building (as would be the case for a manufacturing business), all the equipment and fittings needed, initial inventory, payroll for the required initial staff and so on. Essentially the cost of everything required for the business to start serving customers.
Investopedia’s definition closely matches the most recent discussion I had regarding the start-up costs needed for a franchise business. Franchises typically have very clear start-up costs, given that they are “businesses in a box.” The “box” typically contains a location that meets certain strict requirements, standardized equipment and materials needed to produce their products or services, staff uniforms and other materials that match the franchise brand, standardized quality control measures, and so on. The assumption here is that there will be sufficient sales to operate profitably and repay the initial start-up capital to the business owners and or investors once the business is open.
Realistically, the business world is often unpredictable which takes me to the other conversations that I had regarding startup capital needs:
- One was with an online training business that is growing rapidly and finds itself short of cash flow needed to support its growth rate though it has been profitable from day one. In this case, the definition of startup capital in practice extended to having a buffer to support operating costs for a certain period of time after the business opened.
- The other conversation I had was with a distributor representing a client in a new market. The distributor looked at adding my client’s product line as part of a new business. In this case, they included the initial costs needed to register and start the company and the cost of the first few orders. Though I argued that this was over-conservative as it went well beyond the start-up inventory needs, their concern in a real-world environment is valid.
I wrote this article because, though we have textbook and financial definitions of start-up capital, we need to factor in the uncertainties of the real world in practice along with a very valid and human need for peace of mind.
Thus, I typically factor in 6 months of operating expenses with zero sales as a healthy buffer. It may not always be possible and in such cases, it is good to ask yourself, now that I have invested all this capital to start my business, do I have enough time to make it financially viable, without the stress of feeling that I’m in a race against time?
By Kannan Ramakrishnan
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