Startup Monday: How Much Money Does Your Startup Actually Need?

One of the easiest mistakes for a new founder to make is confusing how much money they want with how much money the business actually needs. It is tempting to start with a big number. New office, equipment, staff, marketing, technology and enough cash to keep the business running for a year or two. But raising or spending more money than necessary can create its own problems.

A better approach is to work backwards from what the business needs to get started, reach its next milestone and keep operating while it gets there. Here are four steps founders can use to work out how much money their startup actually needs.

Start With the Costs You Know

Begin with the costs you will have to pay before the business can properly operate. These could include registering the company, building a website or product, buying equipment, setting up software, securing premises, hiring initial staff and launching your first marketing campaign.

Separate these from your monthly operating costs.

For example, a startup might need R90,000 for initial setup and then R54,000 a month to operate. Those are two different numbers and should not be treated as one expense.

Make a list of every cost you can identify. Then ask whether each one is necessary now or can wait until the business has customers and revenue.

You may find that some of the things you planned to buy are useful, but not essential to getting started.

Work Out Your Monthly Burn

Once you know what it costs to operate, calculate your monthly burn rate. This is simply the amount of money the business spends each month to keep running.

If your startup spends:

• R22,000 on salaries
• R9,000 on technology and software
• R7,000 on marketing
• R5,000 on rent and other operating costs

your monthly operating cost is R43,000.

If you have R430,000 available, you have roughly 10 months of runway before that money runs out, assuming spending stays at the same level and the business generates no additional cash.

This calculation is important because revenue rarely arrives exactly when founders expect it to.

Founder’s Tip

Do not measure your startup's financial needs by how much money you can raise.

Measure them by what the business needs to accomplish and how much cash it will take to get there.

Every expense should have a reason. If hiring another person helps you serve more customers, that cost can be justified. If an expensive office does not help you acquire customers or deliver the product, it may be something to postpone.

The goal is not to spend as little as possible. It is to make sure the money you have gives the business enough time to prove that it can work.

Your Action Plan

Take 30 minutes to list your startup’s one-time and monthly costs, then work out how long your current cash will last. Set a lean, expected and growth budget, and calculate what you need to reach your next milestone. The goal is simple: know how much money you need before you start spending it. Read More Start-Up Mondays HERE