Have you ever asked yourself this question and come up with an honest answer? Most small business owners don’t do a thorough cost analysis after that first one which is required when they write a business plan. The bank will look for you to give them a detailed projection of how much you will spend and what you expect to get in return when you apply for a small business loan at the outset of your new venture, but what about operating expenses once you’re up and running?
The amount of money that you require to cover all expenses including rent, leases, mortgages, payroll, inventory, supplies and incidentals is called your “minimum working capital requirement”. You can measure it as a weekly, monthly, or annual number but if you’re going to be successful in business you really should calculate exactly what it is. Not knowing means that you are basically flying without instruments, certain to crash at some point unless you are really lucky.
Once you know what your minimum working capital requirement is you’ll need to make sure that you have it available up front, before you sell any of your current inventory. If you rely on sales, which are a variable number, to cover costs, which are mainly a fixed number, you might as well go to the racetrack every day and bet the Daily Double to finance your business. To be on solid ground you will need to have your costs and expenses covered before you sell a single item. It may sound impossible but it can be done if you set up your financing correctly.
When you take out that first loan to get started, put the bulk of it in the bank and then apply for a working capital line of credit. Use that line of credit to purchase your inventory. The payment terms that you get by doing this will allow you to make that first sale before you have to pay out anything for your merchandise. A similar system is to use a business credit card to buy inventory and pay off the balance in thirty days to avoid interest charges. By supplying yourself working capital in this way you ensure that your cash position will always be strong.