Deciding to open a new business requires an extensive amount of planning, and incorporating a financial calculator should be a given. Before forging ahead with buying inventory, pursuing a commercial loan or hiring your first employee, putting a total dollar amount on opening up shop will help determine if it's a feasible idea or just a pipe dream.
A lot of accounting
Some expenses are a one-time affair, but others are recurring. Rent, utilities, wages and taxes will come at you every month, but fixtures and licensing fees should only hit once and be done. You'll also need to determine which are fixed recurring payments and which will probably change over time. Rent will most likely stay the same from one month to the next, but cost of goods and shipping may change depending on the economic climate.
There's also the time all this takes to gather and establish a business, during which you may not have the same level of income, especially if you've left a job to pursue a new company. When figuring out a seed total, having a nice round number is easy to get your head around, but try to make sure it's a rational reflection of the actual monetary and physical investment.
"You're supposed to predict what you're going to need in the next 18 months," said Josh Miller of Branch at a the Business Insider's Startup 2012 Conference. Miller set his seed total at $1 million and managed to double it for his startup but wasn't really sure how much he would need. "We have three co-founders, and we can build the product alone. And if it doesn't take off, well then we don't need anyone. There's no way to predict that."
Brad Hargreaves of General Assembly had similar advice, saying, "Seed stage raise as much as you possibly can… You can actually calculate how much you need for 18 months of runway. The way you decide how much to raise changes depending on what stage you are."
Look at your level
Sometimes looking at other businesses in your market can give you an idea of what to expect in terms of costs and overhead. There are publicly traded companies and some that publicize their expenses, or you can pursue contacts within local or national companies to get financial data that can help you plan for the months ahead. The U.S. Securities and Exchange Commission keeps records of quarterly reports, tax filings and other forms that can be helpful when trying to work your own financial calculator. You may not be operating at the same level as a national chain just yet, but proportionally their expenses could be similar to yours, so be aware of entity sizes.
When you do seek out investors, be sure you have an idea of what your business is worth, whether it's a total of liquid, physical or time assets. Little things can impact what investors are willing to give you, critiquing everything in a business plan from the concept to the intended market all the way to the name you've chosen for your business. Having already looked at competitors in your area, you should be able to provide information to potential investors showing how similar companies have done. Even if you aren't turning a profit yet, proving the likelihood that revenue will be forthcoming will appeal to investors and show that you are on top of things.
Coming up with a seed amount shouldn't be an arbitrary process. Do your homework and find out how much things will probably cost first to ensure a sound financial plan and draw investors to your business startup.