Inventing for the Rest of Us

A quick survey of the web points out an interesting statistic that many budding business builders may not realize. New businesses do not go after enough cash to get a solid start.

If Your Estimates Are Guesstimates

Underestimating what it takes to sustain a business can be a fatal flaw in an otherwise perfect business plan. Patricia Schaefer, writing for the web site Business Knowhow, is among those who rate insufficient capital very highly as a major cause of venture failure. “Business owners underestimate how much money is needed and they are forced to close before they even have had a fair chance to succeed. They also may have an unrealistic expectation of incoming revenues from sales.”

Notice the second half of Patricia’s statement – inexperience can cause the new business owner to not only misjudge what kind of funding is required to actually keep a business afloat long enough to become established, but because they don’t have adequate experience, planned revenues are often over-estimated and dependent on too many uncontrollable factors. If you don’t allow enough of a cushion, the business itself may barely have a chance to get started before a funding squeeze forces a closure.

Consulting with a professional accountant, banker, small business mentor or other individual experienced in your line of business may help you recognize where you might be erring in your estimates one way or the other.

Don’t Be Bashful

According Brad Sugars of Entrepreneur.com, “In a 2004 U.S. Bank study of reasons for small business failures, 79 percent cited “starting out with too little money” as one of the causes of their collapse. That’s often because entrepreneurs who are wet behind the ears don’t realize that they should calculate their borrowing needs based on their worst-case scenario instead of their best-case forecast.”

Our natural inclination is put our best foot forward. No one wants to walk into a meeting and throw down a spreadsheet with horrible numbers, but that’s what a worst-case scenario forecast is. You, of all people, want your business to succeed, but you owe it to yourself and your potential investors to think about the unthinkable and make sure your funding request covers it. What if you lose your key man -does your funding allow for carrying key-man insurance? What if your design computers get hit with the worst virus known to man – does your funding allow for the maintenance of complete off-site backups of sensitive data? What if your market sector suffers a setback – a recall, a class-action suit or something similar that doesn’t involve you directly but affects how consumers view your product. Do you have enough of a cushion to be able to sustain your business operations until the industry recovers?

Remember that the people funding new business ventures want them to succeed. Don’t shortchange yourself by asking for just enough funding to get by – make solid estimates for what it will take to get your business established and self-sustaining. The best way to impress your investors is to plan and execute well enough to generate a return.