calculating startup capital requirements

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CALCULATING STARTUP CAPITAL REQUIREMENTS

8

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Identifying Startup Resource Requirements

Startup resources include:• People (founding team, employees,

advisors, independent contractors)• Physical assets (equipment,

inventory, office or plant space)• Financial resources (cash, equity,

debt) Bootstraping• Minimizing resources to keep low

overhead • Creating innovative combinations of

resources to generate competitive advantage and wealth

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Steps in Calculating Startup Capital Requirements- “Cash Flows”

Figure 8.1

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Steps for an Entrepreneur to Determine Resources Construct a Business Process

Map

Position the Venture in the Value Chain• Position determines

margins, customer, and pricing.

Create a Timeline, Milestones, and Triggers

Price for Feasibility Analysis

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Pricing Strategies Product pricing is a part of marketing

strategy and financial strategy. How a product or service is priced is a

function of a company’s goals. Customer goals also influence

entrepreneurs’ pricing strategies. Converging on a price• Triangulate by taking into account costs, any

competitor pricing, and feedback from customers and value chain partners

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Startup Financial Metrics Customer acquisition costs (CAC) Average order size, time to reorder,

lifetime value per customer Revenues per salesperson and time to

revenue for direct sales For Web 2.0 Ventures: acquisition,

retention, revenue, viral coefficient Contribution margin Monthly burn rate

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Develop Financial Assumptions Estimate new product/service

demand: • Use historical analogy or substitute

products• Talk to customers • Interview prospective end-users and

intermediaries• Use the entrepreneur’s knowledge

and experience • Go into limited production

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Estimating Revenues, Expenses, and Startup Costs

Manufacturing businesses should develop physical prototype early to understand all that is needed to produce product.

Physical prototypes take time and more money than ultimate production costs.

Service companies should prototyped under a variety of the most common scenarios.

Experience in industry is valuable for tapping best industry intelligence.

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Sales Forecast Increases in sales are influenced by:• Growth rates in the market segment• New innovations offered to make the

product/service more attractive• Technological innovations to enable

production at a lower cost

Expenses Items to consider:• Cost of goods sold (COGS)• Sales, general, and administrative

expenses (SG&A)

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Calculating a Startup’s Cash Requirements

Step 1: Develop cash flow statements• Clearly depicts cash inflows and

outflows

• Add contingency factor for safety

• Identify types of capital resources required: capital expenditures, startup expenses, working capital, safety margin

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Assessing Risk Analyze financial risks and

benefits.• Is the business financially feasible?

• Is there enough money to make the effort worthwhile?

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New Venture Action PlanDetermine the startup metrics for your

company.Gather the numbers you need for performing

your financial analysis.Gather sales forecast data through

triangulation.Create a cash flow statement from startup

until a positive cash flow is achieved.Perform a cash requirements assessment to

determine how much capital you will need to start the business.

Determine whether this venture is financially feasible.

End of Chapter 8