Host: Hello I’m Fred Glave volunteer counselor with SCORE counselors to America’s small business. This video series is about the process as required to start up a new business and in this particular video clip we’re going to deal with the all important question of how much money do I need.
Host: Why is it so important to determine all cash needs before starting a business?
Fred Glave: You know even before you start your business you must sit down and figure out how much money you’re going to take in order to make your business profitable. The number one reason for failure of small business in America is lack of adequate capitalization. About capitalization I mean the total amount of money you need not only to start up with your business but to carry you through the early months or years until you’re generating more cash from revenue and you’re spending on expenses on a monthly basis.
Now this is not to be confused with profitability. One can have a very profitable business that’s still using a lot of cash. This often occurs for example when your business is growing rapidly. In that case, what you have to do is buy inventory and hire people to be ready to meet the future sales that are going to happen.
In those cases therefore, when you begin that process you will have to spend the cash but you will not yet collected the revenue from your customer. That’s not bad. What is bad is if you forecast that increasing revenue and you buy the inventory and then it doesn’t happen. In that case then you’ve spent the cash and you’re never going to collect it back from the customer because you never sold on the product.
Now most small business rely at least in part on bank loans in order to fund their business and if you spend more money in a month and you take in your revenue, you’re not going to have enough money to pay the monthly interest on your loan. Then you’re left with only two alternatives. You rather going to have to go into your own bank account and provide more cash or you’re going to have to go out of business.
Now to avoid that last alternate scenario it’s very important that you sit down ahead of time and take a very regular approach figuring out how much cash you’re going to need, how you’re going to spend it and how long it will take before you become profitable.
As we proceed through the next series of clips, we’re going to refer to two or three financial spreadsheets that you may want to have with you in order to help you through these videos. You will find them on our website at Score.org. Simply click on business resources and then templates and look for the three financial spreadsheets. One is called start up expenses, the other is the 12-month profit loss statement and the third is the 12-month cash flow statement.
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