Is Working Capital Money Needed to Start a Business?
Most businesses will require some working capital to start up. How much is actually needed will depend on the business model, the expectations of the owner, one-time and ongoing expenses, and many other factors. Some may find they need a working capital loan for a new business to get going, as their start-up costs are quite high. Others may find they can get started with the equipment they already own or with a few minimal expenses.
If you’re trying to figure out how much money you’ll actually need to start your business or fund a new growth initiative, keep reading for some calculation tips and other important considerations to keep in mind.
How to Calculate How Much Working Capital Is Needed
You can look at and calculate working capital in a few different ways to determine how much-working capital is actually needed. Let’s start with the basics—the working capital formula.
Working Capital Formula
Before you can estimate how much working capital you’ll need, you should first understand how to calculate working capital. To determine a business’s working capital, first, add up the sum total of all its current assets and current liabilities. Then you simply subtract your liabilities from your assets, and you have your working capital.
Working Capital Requirement Formula
The working capital requirement formula will vary depending on the type of business. For example, if you plan to work with suppliers to buy raw materials or goods, you should take that into consideration when estimating how much working capital you will need. That formula might look like this:
Working Capital Requirement = Inventory + Accounts Receivable - Accounts Payable
Even though every business plan will differ, there are a few universal tips that anyone can use when figuring out how much they need for their business. Let’s take a look.
How Much Money Should You Have Before Starting a Business?
Every business model will have different start-up costs, so it’s difficult to nail down a single number that will ensure your business takes off as expected. Still, in the planning stages for a new business, estimating the capital required to start a business is a vital part of the process. As you work to figure this out for your business’s unique working capital management needs, consider the following:
1. Estimate Costs
The costs of a brick-and-mortar business versus an online service provider will vary, so when you’re studying potential costs, make sure you’re looking at a business model that matches your own. Here are some common costs you may encounter:
Utilities
Insurance
Office/Work Space Rental or Purchase
Employee Salaries and Benefits
Advertising and Marketing
Inventory
Raw Materials
Supplies and Equipment
Legal Fees
Business Registration
Licensing
Financial Institution Fees
Continuing Education
Shipping and Postage
Training
Taxes
Software
Maintenance and Repairs
Automobiles
Travel
Professional Association Fees
2. Understand Essential vs. Optional Costs
When you’re tallying up your potential expenses, also take into consideration the type of cost. Business costs can typically be divided into two categories: essential and optional.
Essential Costs - These are the costs your business needs in order to function. For example, if you’re starting a brick-and-mortar business, you’ll need to rent or buy commercial real estate. Hiring employees right off the bat? Then employee salaries will be an essential cost. Other common essential costs include marketing, website development, and basic equipment and supplies.
Optional Costs - Optional costs are for things that would be nice to have but are not necessary for the survival of your business. Entertainment and meal costs are examples of expenses that are probably unnecessary in the beginning stages of your business.
And don’t forget to note if a cost is a one-time expense or ongoing. All of these considerations will help you nail down a number for estimated liabilities.
3. Project Profits
The director of the New York Small Business Development Center in Albany, Bill Brigham, recommends that you project at least the first three months of cash flow for a new business. And don’t limit your projection to only the fixed costs—estimate best and worst-case scenarios so you can be prepared for whatever may come.
Once you’ve estimated costs and profits, you’ll be able to calculate the working capital you’ll need to get your business or growth initiative off the ground and rise toward success.
Need Some Working Capital Help to Fund Growth? Backd Has Got Your Back
Backd is all about funding businesses in the easiest, fastest, and most flexible way possible. You can get funding for your business in three easy steps:
Apply Online - Our application process is quite simple, and it usually only takes a few minutes to complete.
Receive a Decision - Our team is lightning-quick to respond, and you’ll usually have a decision the same day.
Get Backd! - Once approved, you’ll have funds available for use within three days!
And we won’t force you into a payment plan that doesn’t suit your needs. We tailor our funding to fit your business, with adjustable payment options for daily, weekly, or semi-monthly payments. Still have some questions? Contact us! We love talking about business funding with our clients.
