In our Funding a Business Course, we look at how to assess whether you are ready to raise money for your business. Knowing how much money you need to raise is a big part of being ready to talk to funders. So, this week, we’re outlining how you can determine the amount of capital you need to raise.
Identify Major Milestones
Funders usually look to fund a business to its next major milestone. These are milestones that show your business has reduced one or more key risks in its development, such as demonstrating market demand for your product or service through a critical mass of customers or users of your prototype, outgrowing current production facilities, or ideally, achieving consistent profitability. Start by identifying the major milestones for your business over the next few years.
Create a Plan
After you’ve identified those milestones, create a plan to achieve them. The process of developing a business plan will help you create a roadmap for achieving those milestones. Because the business plan is a big picture view of where you are going over the next few years, you should also dive deeper and create a more detailed project plan for achieving the next major milestone in your business – that is the milestone that you are looking to fund. Really spend some time plotting out each step, identifying how long it will take and what resources are needed to achieve that milestone.
Project Cash Flow
Now, translate your plan into numbers by creating a financial forecast. We recommend developing a monthly forecast for the initial year and an annual forecast thereafter. For each period, forecast your business’ revenue, expenses, delays in customer payments, and purchase of assets. Project cash flow by looking at the difference between cash inflows and outflows in each period. You can begin to see how much funding you will need by looking at the sum of the cash flow over the estimated timeframe to achieve the next milestone.
Go back and check your assumptions to make sure they are realistic. Ask yourself if your estimated timeframe for achieving the next milestone is realistic based on the research you’ve done in your industry, the time you have available to dedicate to your business and your capacity to lead the business. Make sure the expenses you identified are necessary to develop the business over that timeframe – that you are not inflating expenses nor are you missing any expenses. Also, add in a small buffer for inevitable mistakes or miscalculations in the implementation of your plan. Lastly, ask yourself if the forecasted revenue growth can really be achieved with the resources you will have.
Choosing the right amount to raise is critical to the success of your business. If you underestimate funding needs, you’ll end up raising less than you need and may find your business in a cash crunch. If you overestimate funding needs, you risk losing credibility with funders and may not be able to raise the funds you need on reasonable terms, if at all. So, before you start talking to funders, make sure you have identified your milestones and have put together a well-thought out plan and financial forecast.