Free tool
How much do you need behind you?
Not how much it costs to open. How much it costs to keep going until the business pays for itself and for you, which is a different number and usually a much bigger one. This models it month by month and finds the deepest point of the curve, because that is what you actually have to fund.
Startup reserve
Worked from figures entered by the reader. Indicative only, and not advice of any kind.
The curve turns, and then it recovers.
The business reaches the point where it funds itself and the household, and then keeps going until every dollar you put in has come back. The number that matters is not the setup cost, it is how deep the hole gets before that happens.
Cash you need behind you
68,172 dollars
$45,000 to open, and the rest to carry the business and the household to the bottom of the curve, which falls in month 3.
Covers its own costs
Month 3
Before you are paid.
Covers the household too
Month 4
The month it stops costing you.
Back to where you started
Month 14
Every dollar recovered.
Indicative only. Revenue is assumed to climb in a straight line to the settled figure, which no real business does. Nobody knows the true curve in advance, so the useful thing is to move the ramp out by three months and look at what happens to the reserve.
The method
The trough, not the opening cost.
Almost every version of this question gets answered by adding up the setup costs and putting a few months of rent behind it. That is not how the money runs out.
| Step | How it is worked out | Why it matters |
|---|---|---|
| The ramp | Revenue climbs from its opening share to the settled figure over the months you enter, then holds. | A straight line is a simplification, and an honest one. Nobody knows the real curve, and the length of the ramp moves the answer more than any other input. |
| What the business throws off | Revenue times the gross margin, less the fixed costs, each month. | It is negative at first. The month it turns positive is the month the business stops being a drain, which is not the same as the month it starts paying you. |
| What the household takes | Your living costs, every month, from month one. | They do not pause while the business finds its feet. Leaving them out is what makes a reserve figure look manageable and be wrong. |
| The reserve | Setup costs, plus the deepest the running cash position ever gets. | The trough is the number, and it almost never falls in the first month. That is what makes this different from adding up what it costs to open. |
The ramp
- How it is worked out
- Revenue climbs from its opening share to the settled figure over the months you enter, then holds.
- Why it matters
- A straight line is a simplification, and an honest one. Nobody knows the real curve, and the length of the ramp moves the answer more than any other input.
What the business throws off
- How it is worked out
- Revenue times the gross margin, less the fixed costs, each month.
- Why it matters
- It is negative at first. The month it turns positive is the month the business stops being a drain, which is not the same as the month it starts paying you.
What the household takes
- How it is worked out
- Your living costs, every month, from month one.
- Why it matters
- They do not pause while the business finds its feet. Leaving them out is what makes a reserve figure look manageable and be wrong.
The reserve
- How it is worked out
- Setup costs, plus the deepest the running cash position ever gets.
- Why it matters
- The trough is the number, and it almost never falls in the first month. That is what makes this different from adding up what it costs to open.
A worked example
When the fit-out is the small number.
$120,000 to open, $31,000 a month to run, and a household needing $7,500. Ten months to reach $68,000 a month at a 58% margin.
It stops costing you, but you do not get it back yet.
The business does reach the point of covering itself and the household. It just does not recover what you put in within the period modelled, which is a real answer rather than a bad one, and it is worth going in knowing it.
Cash you need behind you
$269,300
Covers its own costs
Month 8
Before you are paid.
Covers the household
Month 10
The month it stops costing you.
Back to where you started
Beyond 24 months
Every dollar recovered.
The fit-out is $120,000. The reserve is $269,300, which is more than twice it, and every dollar of the difference is the cost of the ramp rather than the cost of opening.
Somebody who saved the fit-out cost and a little more would open this business, and would run out of money somewhere around the middle of the second year, in a business that was working exactly as planned.
What this does not cover
- Seasonality, which can move the trough by months either way
- Any borrowing, which changes the shape of the curve and adds repayments to it
- Tax on profits once they arrive, and the timing of when it falls due
- Working capital cycles, including stock held and the wait to be paid
- Anything going wrong, which is what the extra three months on the ramp is for
Need this as a document someone will read?
A lender, a landlord or an investor wants the forecast behind the number, not the number. Lender-grade business plans and three-way forecasts start at $850.
Want the finance arranged as well?
This site does the analysis and the documents, and does not arrange credit. The broking is done by The Lending Lab, a separate business run by the same person. Send a few details and Nicholas handles it himself.
Common questions
Because the setup cost is only the money spent before you open. What sinks most new businesses is the months afterwards, when revenue is real but not yet enough, and both the business and the household still have to be paid. The reserve is the setup cost plus the deepest point the cash position reaches, and that trough usually falls several months in rather than at the start.
Because they do not pause while the business finds its feet. A business that takes eight months to cover its own costs has to be funded through those eight months, and so does the household attached to it. Leaving personal costs out is the difference between a reserve figure that looks manageable and one that is real.
It usually does, and that single assumption moves the answer more than any other. Add three months to the ramp and look at what happens to the reserve. If the business only works on the optimistic version of that number, you have learned something important before spending anything.
That at the settled revenue and margin you have entered, the business still does not cover its costs and your household. That is not a funding problem and no amount of reserve fixes it: the revenue, the margin or the cost base has to change. It is a hard answer and it is far cheaper to get it here.
It tells you the hole, which is where that conversation starts, but borrowing to fund a startup ramp is a different proposition to borrowing against a trading history and lenders treat it that way. Nothing here is credit advice or an offer of finance.
General information only. Not credit advice, not a credit assessment, and not an offer of finance. Andorra Advisory Group does not arrange credit and is not a credit representative.