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Better to Analyze Cash Requirements than to “Launch and Hope”

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Starting a new business has its own special risk.   In the last few weeks I blogged about two ways that founders of start-ups can lower their risk: 1) making good business decisions based on industry knowledge, and 2) executing well.

 

A third way is by having knowledge of how much initial funding is likely needed to carry the business from the time it is launched until it reaches a point where it is cash flow positive, especially as new businesses don’t typically have much access to outside funding sources.

 

It is typically not possible to make an exact estimate of how much this initial funding needs to be, because the nature of a new product or service launch is that the founder has to invest in marketing to “get the word out,” and it’s hard to tell: 1) how effective that marketing will be in terms of stimulating initial trial purchase and 2) how many consumers who try it once will come back and purchase again.

 

Based on the start-up business owners I’ve met over the years, about half will nonetheless attempt to estimate the funding needed and whether they have the needed funds, before they commit to the venture, fiscally and emotionally. But then there is the other half who get quite a way into things without doing that calculation, either because they are daunted by the uncertainty, they don’t know how to do the math, or perhaps because they are scared by what it might tell them.

 

What we do in our work with clients is estimate a low side, mid-case and a high side scenario, in order to show how the various marketplace responses translate to cash requirements.   Further, there are typically many expenditures of opening up shop which are very predictable, and we are able to project these with a greater degree of certainty, which is all the more reason for doing the exercise.   It is always better to model the cash requirements, then to “launch and hope” that the cash on hand will be sufficient.

Here’s One Question Never to Ask When Seeking Funds

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“If a banker asks how much money you want to borrow, and you respond ‘how much will you give me?’ you’ve just disqualified yourself,” Madeline Marquez, VP at the Business Initiative Corporate of New York, told an audience of 200 at the Javits Center, as part of a panel discussion on how start-ups should access capital for their business.   It shows you haven’t done your homework, you haven’t prepared, Ms. Marquez explained.   She advised audience members who may be seeking SBA-guaranteed loans to start by filling out the SBA form 912 for key management, and the SBA form 413 if you are checking out different banks.

Moderator Steve Cohen, SVP with Empire State Development, led off the panel discussion with a review of various New York State programs and resources to fund and support entrepreneurship.  Programs mentioned by Mr. Cohen included the following:

Ed Lynch, VP and Credit Relationship Manager for Flushing Bank said that loan seekers need to submit a business plan which should address the following:

  • Sources and Uses of Funds
  • What % equity will they put in to purchase equipment, working capital, real estate
  • How are they going to repay the loan
  • If an existing business, what is the company’s history
  • What is the past background of the principals, and why are they going into this particular line of business
  • Detailed description of the product/service
  • What is the revenue model, what is the customer base, and the demographics

Finally, Dan Vacarro, VP of the NY Business Development Corporation rounded out the panel, mentioning that he pays special attention when loan applicants are passionate about their business.