How Much Money Do I Need to Start My Business?

Joe Collins, CPA, CA
February 11, 2019

Affiliate disclosure

A big part of launching your business is understanding how much cash you’ll need to bridge the gap between the time when all you have are expenses to when your sales start to cover your expenses (and more).

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Not having enough cash to pay your suppliers is trouble, but when you have employees your worry doubles. A big part of launching your business is understanding how much cash you’ll need to bridge the gap between the time when all you have are expenses to when your sales start to cover your expenses (and more).

How much cash you need is mostly science, but getting too exact about it is a recipe for failure. You may have heard before that plans in business are better described as guesses. If you are going to be guessing, guess in a way that gives you some flexibility and get more cash than you think you need. There will be things that come up that you didn’t plan for, so going back to lenders for more cash early is a big no-no.

To start, break down all your expenses into two large categories:

  • one-time, upfront start-up costs, and
  • ongoing operational costs.

You will then want to estimate your sales or cash in the door. In the simplest terms, you need enough cash to get you through to when the business becomes "cash flow positive" or you sales exceed your ongoing expenses. Let’s dig in!

(To follow along with our simple template, open this, take a copy and edit away!)

Upfront Costs

Upfront costs can be thought of as any expenses you will incur before opening your doors. For a bricks and mortar company that could be store improvements, buying inventory, setting up utilities, rent before doors open and all those little things you will need like permits, licenses and insurance.

Spend the time to understand each and every conceivable expense required to get your business started. However, resist the temptation to get too precise with them. Assign a value to each and move on. Inertia kills plans - we are not trying to be perfect about this as costs will change and you’ll know more later.

If you are building a cash flow forecast in an spreadsheet, all of these costs will go under a “time 0” column. We don’t really care when exactly these expenses will happen, we just care that we are comprehensive in outlining them. Create a section on your spreadsheet that lists all of these expenses out and then enter their estimated cost under the Time 0 column.

Bottom Line: Be exhaustive in your list of your start-up costs, but don’t get stuck on figuring out exact costs. The goal is to maintain momentum and we’re going to make sure we have more money than we absolutely need anyways.


Now you want to create columns for each month of the next year or two. You can create longer forecasts, but they tend to get meaningless after 1-2 years as so much can change in that time. Remember the goal of this forecast is to determine how much cash you need to get started, so it doesn’t have to go longer than your cash-positive month unless you have bigger seasonal swings in business and suffer cash-negative months each year.

The next section of your cash flow should be your sales estimates. This is really a shot in the dark and can cause a lot of anxiety. Unless you have a really in-demand product or service, you are going to want to slowly ramp-up these sales. Pay attention to any seasonal cycles you expect within your business as well.

You are trying to find a balance between realism and optimism here with a touch of “what would happen if sales were even slower?” You can work in some best, probable and worst case scenarios later, but don’t worry about that yet. Stick to your best guesses for now.

Bottom Line: Make your best sales estimates, but make sure you are doing this on a cash basis and not when you make the sale. Stripe can take 7 days to arrive in your bank account, customers may “misplace” your invoice.

Operating Costs

Your operating costs are all of the costs that are recurring in nature related to the operations of your business. In the next section of your forecast, you list out every expense you can think of and assigned a value to it. Make a big list of your operating expenses and assign a best guess of the cost of each. Copy these amounts over for each month of your forecast.

Some operating costs will be fixed (stay the same despite sales volume) and others will be tied to your sales. You can create a formula to increase these costs as sales go up such as a percentage of revenue.

You need to live

When you are approaching people to invest in your company, it’s tempting to only draw a small amount of money from the company as owner/manager pay. However, you need to live. If you are worried about how you are going to pay your personal bills, you will not be fully focused on building your business. Understand that your work when building your business is worthy of compensation and plan for it. We recommend paying (or at least acknowledging) a market salary for yourself as the business owner.

Bottom Line: Again, be exhaustive with your list, but no need to be exact. Don’t forget to make sure you can live - you need some sort of income to feed and clothe yourself.

Tally It Up

Now that you have all your expenses and sales listed out, you’ll want to tally them up. Total your upfront costs and your sales and operating expenses for each month. Create a net cash flow for each time frame. For time 0, you are going to have a large outflow of cash and each month might have a net outflow of cash for the first while - that’s normal.

The next step is to create a cumulative cash balance row in your spreadsheet. This is the cash balance you have at the end of any month. To calculate this, you add your balance from the previous month to the net cash flow for that particular month. This will give you your closing balance for that month.

The goal of this row is to see the lowest possible cash balance that you would have during your start-up. This is the (minimum) cash you need to start your business. This is the smallest amount you need to find to start your business. Remember this: negative cash means you do not have a business - you need to find more money.

Bottom Line: The amount of money you need is the culmination of all of your net cash outflows until you are cash positive on your operations.

The Trip Wires: Why You Should Ask For More Than You “Need”

There’s no hard and fast rule about how much extra you will need on hand above what you have determined what you need.

Expect the Unexpected

As much research as you do, you will miss things. Occasionally, that can be in your favour, but mostly it’s unknown expenses or overruns. The best you can do is expect the unexpected and have some more cash on hand to deal with it.

Cash Matters, Not Sales

Cash cycles are how cash moves through your business. In a simple world, you would sell a product, collect the cash and pay your supplier all at once, but the real world doesn’t work like that. Often you need to buy raw materials, compensate people and pay deposits before you have made a sale - and then your customer doesn’t pay you for 30 days! All the while, you need a stockpile of cash (working capital) to fund this lag between the cash outlay and collection.

The larger you grow, the more cash you need to fill this gap. The amount of cash required will vary by business and industry, but, as a rule, new small businesses generally get the worst terms - it’s a reality you’ll have to deal with.

There will be monthly and seasonal cycles. When asking for investment, you need to understand your lowest cash balance and build in some buffer for the unknowns.

Monthly Balances Are Only Part of the Information

We just calculated the monthly balances of your cash, but if you have a lot of outflows in the middle of the month and get paid at the end of the month, your cash balances will be lower than these amounts throughout the month. It’s best to have a buffer for these periods where your cash balance may go lower than your expected lowest month-end balance.

Where to start

Now that you are armed with the knowledge, it’s really a matter of just starting! Here’s the best cash flow tool we have come across - provided by Futurpreneur. It covers the components we discussed in this article and gives you some nifty reports as well. You can also grab a copy of our simple Google Sheet shown above.

If you need some extra help getting started, reach out. We love to answer your questions and we have some options for your bookkeeping and accounting as well. Cheers!

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Article by
Joe Collins, CPA, CA
Originally published
February 11, 2019
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