How to Determine the Asking Amount for Your Business
If you’re a startup that needs funding ( from an SBA loan, an investor, or other source) or you’re an existing business looking for funding for your next expansion project, there’s one thing your business plan needs in order to help you raise the capital you need : This important thing is your firm asking amount, which needs to be rooted in tangible assumptions and clear rationale. To come up with a reasonable number, you need to start by putting together your business plan financial projections.
This post will help you understand how to use your projections to walk to the best asking amount for your business.
How much money should I ask for?
Understanding exactly how much money you should ask for is important. Asking for too much without justification can result in rejection, and not asking for enough can still leave you cash strapped if you do get the money you asked for.
Getting to the perfect middle ground with your magic number doesn’t have to be complicated, it’s just a matter of making sure you rely as much as possible on your business plan financial projections.
To put this into action, let’s walk through some examples:
Example #1: A Brand New Business
This first example scenario assumes you’re starting a brand new business from ground zero, and are trying to figure out how much money you need.
Step 1. Map out what you need to pay for or buy from now to your grand opening or launch.
Step 2. Fast forward three months into your operations and estimate what your monthly operational costs will be.
Step 3. Add those three months of operating costs into pre-launch costs.
A moment of bluntness: The asking amount will NEVER BE ACCURATE.
It’s simply meant to be a forecast, a smart guess so try not to get stuck in the weeds. Every single detail is almost impossible to predict, and you won’t really know exactly what it costs until you start actually preparing for launch.
Focus on getting a good ballpark number, and on feeling confident enough to move on from there! Try to avoid the hole of thinking that there is an absolute “right” number to reach, because no number is going to be perfect.
Example #2: Ballpark For a New Business
Here’s another scenario that may help paint the picture even clearer.
For example, If you are trying to start a salon, you can start by mapping out all of the costs related to set up. This will include everything from chairs to mirrors to products to dryers to building signage. Let’s assume these costs total $35,000 for the sake of example.
Then, think about your day-to-day costs. Again, products, electricity costs, monthly rent, and paying employees. Let’s say these costs are about $10,000 per month in total.
You will add $35,000 in set up costs, plus $10,000 for the first month, $10,000 for month two, and $10,000 for month three.
In this scenario, you’d need $65,000 to start your salon. This number is what you would bring to any bank when applying for an SBA loan.
Is it really going to cost $65,000 to get started? Maybe, maybe not. As long as you put a little thought to it, that number should at least be in the ballpark and will get you the right amount of money to get things started.
Example #3: Existing Business Expansion
For this example, we’re going to use an existing business looking to expand.
Let’s say you’re currently running a coffee shop.
Your set up costs are already accounted for as you’re up and running, but you’ll need to consider all the costs associated with expansion.
If you’re renovating or building on to your current space, you have costs for a contractor and all the trades. This includes everything from plumbing, electrical and drywall, to permits, plans, and the cost of labor. Let’s assume we’re talking about $15,000 to do all the work needed.
Next, you have your daily costs to consider. Things like additional payroll, electricity and products should all be factored in. You may also have to consider any costs you have to absorb due to lost revenue if you have to close for any period of time during construction. So let’s say these monthly costs will run you approximately $8,000 a month.
Lastly, you need to look at what other costs will be required to complete the expansion. You may need new furniture, additional equipment, new signage and so forth. For this example, we’ll tally these up at $10,000.
When the time comes to apply for your loan, you would be asking for $49,000. Broken down this comes out to $15,000 for construction, $10,000 for additional expenses, plus $8,000 for three months of daily costs.
Again, like the examples above, this is an estimate. You may end up coming in under or over budget. But the key is to ensure all of your business financial projections include as much as possible so you don’t find yourself in a position of being too short to complete your project.
As shown with the example above, the key to creating a strong business plan comes down to planning, planning, planning. With a little time spent crunching the numbers, you can put together a business plan that gets you that much closer to securing the needed funding.