Estimating the Money You Need

"A billion here, a billion there, pretty soon it adds up to real money." -- Senator Everett Dirksen

Whether you want capital for startup costs, short-term operating costs, or long-term strategic development, you must accurately estimate the amount of money you need. Preparing a realistic projection of the necessary funding will not only force you to consider the wide variety of costs associated with your plans, but also help convince a lender or investor that you understand your business and the relevant market realities.

You can expect a financier to want to know the amount of money you will need from the beginning to the maturity of the project, details on how the money will be used, and most importantly, how the money will either be repaid or result in a profit. All of this information should be included in your business plan and confirmed in your financial projections.

Anchoring Estimates to Reality

You can make your capital projections appear more realistic by referring to the sales and expense information characteristic of your industry and business that is published in sources such as Dun & Bradstreet. These compilations can provide you with objective data to support your projections of sales figures and anticipated expenses.

When using published sales/expense ratios as a reference for financial projections, choose a business rated in the top quartile of the relevant small business market as a model for sales projections. The expenses will not necessarily vary with the success of the business and your overall ratio will appear more positive if you've selected a prosperous reference business.

You should also be aware that the reasons behind your capital needs may raise some lender concerns about the management and future success of the company. If, for instance, your business is growing, a need for additional working capital may be a result of managerial shortcomings that are causing slow sales, high inventory, slow collections, or unmet short-term debt. In situations where additional funds are necessary because unanticipated sales volume is creating greater needs for inventory or collection of accounts receivable, management may need to show that the business can expect continued success.

• If you are estimating the cost of a startup business, additional considerations apply.
• Whether you are financing a new or existing business,
  a well-thought-out business plan is essential.