From the course: Creating a Business Plan

Capital requirements

From the course: Creating a Business Plan

Capital requirements

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- It takes money to run a business. And there are three critical numbers you'll have to know. Capital on hand is how much cash do you have in the bank. Your burn rate is how much money are you spending every month to pay your staff, to run your business. And then runway is, if you look at how much cash you have on hand and assume no more money comes in, how long do you have before you run out of money? Obviously the longer the runway is the safer your business is. You'll also need to create a perspective on when you'll hit cashflow breakeven. Which is, when is the business generating enough money, enough profit, to pay the costs of running that business every month. And your investors are going to want to know at what point are you going to hit cashflow breakeven. Because that's when you don't need any more money invested. Your business plan should also spell out where you plan on getting your capital from. Will it be from the owners, loans, friends and family? Will you seek outside investors or grants? Will you work with partners who will give you money? Also, what are you going to use the capital for. By the way, the only good uses of capital in the early years of running your business are things that drive sales. Marketing, Salesforce, or product development. If you're spending money on anything other than those items your investors are going to question it. At one point, I ran a business with some friends and we had some initial capital that was invested from the founders. We took money out of our own pockets. Some friends and some family members. We sought outside capital from some angel investors. And we actually didn't get it initially because they wanted to see how the business would perform for a little while before they put their money in. They thought it was too risky at that point. Our initial capital went to building the technology platform and our business was restricted because we couldn't invest much in the sales efforts. We ended up never having enough cash on hand to drive sales and we couldn't reach cashflow breakeven. The business wasn't viable. So as you're thinking about your business, be very clear about how much money you're going to need to hit the point where the business is self-sustaining.

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