Why is it so important to determine all cash needs before starting a business?

    Published: 06-16-2009
    Views: 23,079
    Financial expert Fred Glave discusses the processes required to start up a new business.

    Fred Glave: Hello, I am Fred Glave, volunteer counselor with SCORE, Counselors to America's small business. This video series is about the processes required to start up a new business. In this particular video clip, we are going to deal with the all important questions of how much money do I need.

    Host: Why is it so important to determine all cash needs before starting a business?

    Fred Glave: Even before you start your business you must sit down and figure out how much money you are 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 and by capitalization I mean the total amount of money you need, not only to start up to your business but to carry you through the early months or years until you are generating more cash from revenue than you are spending on expenses on a monthly basis.

    Now this is not to be confused with profitability. One can have a very profitable business but still using a lot of cash. This often occurs for example, when your business is growing rapidly. In that case, what's you have to do is buy inventory and hire people to be ready to make the future sales that are going to happen. In those cases therefore when you begin that process you will have to spent the cash but you will not yet collected the revenue form 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 spent the cash and you would never going to collect it back from your customer because you never sold him the product.

    Now more 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 when you are taking in revenue, you are not going to have enough money to pay the monthly interest on your loan. Then you left with only two alternatives. You are either going to have to go into your own bank account and provide more cash or you are going to have to go out of business. Now to avoid that last alternate scenario, it is very important that you sit down ahead and again, ahead of time and take a very rigorous approach to figuring out how much cash you are going to need, how you are going to spend it and how long it will take before you become profitable.

    As we proceed through the next series of clips, we are 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. It's 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 and Loss Statement and the third is the 12 Month Cash Flow Statement.