How Much Cash Does Your Startup Need? Three Tips for Calculating Costs

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By ideapros 19th Dec, 2018

Starting a business is exciting. At times, it can also be downright frightening. Many entrepreneurs are gung-ho about putting their product in the hands of customers. They are less enthusiastic about the financial side of running a company. If you’re considering starting a business, here’s how to map out your finances and stay on a budget while you grow.

 

1. Start small

As a startup founder, you may have a grand vision of getting thousands of happy monthly users. But “acting big” from the start can be dangerous. Perhaps counterintuitively, an intimate approach often works better. As P. Graham observed: “The most common unscalable thing founders have to do at the start is to recruit users manually. Nearly all startups have to. You can’t wait for users to come to you. You have to go out and get them.”

Build your initial database carefully. You’ll probably have to do this by hand. Start small and invest in the relationships. Measure your results to clarify exactly how many touches it takes to convert a cold prospect into a sale.

Relatedly, you need a granular understanding of your Customer Acquisition Cost (CAC). Exactly how many hours does it take to get a conversion? How does that pathway look? Regardless of how you get funded or how you sell, map the process simply and improve it over time.

“Start small” can also mean that you may need to bootstrap through your hustle. That may mean that you take up an extra shift or a day job to fund the essential preparation to launch. Costs to calculate include:

  • The amount of time needed it takes to get someone to buy (test and measure)
  • The cost in dollars of client acquisition
  • The cost of the founder’s time
  • The results are important to venture companies Sharks in the Shark Tank need to see sales
  • You need to measure your sales as well as the costs required to get those sales

 

2. Clarify your upfront costs and monthly costs

Look at every dollar you spend on marketing as an investment. You invest your money to grow your wealth. The same goes for investing in Marketing and Sales. Invest in yourself first. Become better at sales. Improve your marketing costs. The most successful in business know how to sell their ideas and get buy-in. Your first upfront cost will be to educate yourself–or to hire someone who can fill the gap while you learn.

Along those lines, understand the distinction between upfront costs (needed to start) and monthly expenses (that ding your account indefinitely).

Most small businesses fail when they run out of cash due in general to ongoing costs. The problem is the monthly overhead. Calculate the costs necessary to keep your business running. Overestimate this number by 25% to be safe. Be realistic about how long it may take to become profitable. You need a margin of safety to experiment and make mistakes.

 

3. Don’t overlook marketing costs

The famous Pareto Principle declares that in specific systems there exists an imbalance. About 20 percent of causes lead to 80 percent of the results. As a business owner, you must clarify these points of leverage. One such inflection point is your marketing. Sadly, most entrepreneurs don’t understand what marketing is or how to run their marketing processes sustainably. If you cannot educate prospects to desire your products or services, you will not succeed, long-term.

You get what you pay for when it comes to marketing. Rather than nickel and dime your way forward, partner with professionals who can be strong where you’re weak—who can fill in the gaps. As a bestselling author, Jim Collins, once observed:leaders of companies that go from good to great start not with “where” but with “who.” They start by getting the right people on the bus, the wrong people off the bus, and the right people in the right seats.”

 

Final Thoughts

Grow your database. Relationships matter. Build them by hand. Figure out what they need, and fall in love with them. Get them to visit the site one more time or spend a few extra dollars each. Sweat the small stuff. Adopt a “first them, then you” mentality.

Know your numbers. As an entrepreneur, your main job is to achieve clarity. What gets measured, gets managed. So ask yourself on a regular basis:

  • What’s the most profitable aspect of the idea or the business? What’s the least profitable?
  • What’s the Cost of Client Acquisition? (total acquisition expenses / No. of new customers)
  • What’s the average sales value per transaction?
  • What’s the average life of a client? (how many times will they buy)
  • What’s the lifetime value of a customer? (Profit per visit x No. of visits x No. of years in an area)

If you cannot answer these questions in a crystal clear way, get help. Find someone competent who can lead you to the answers. Even estimates are better than nothing–what’s doing well is worth doing poorly at first. These numbers will determine the way you manage your time, how much you should spend on sales and marketing, and what needs to be adjusted.


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