Estimating Your Funding Needs – Intro

Once you have formed your company and gotten your permits and licenses, you are going to need to establish how much money you will need in the bank to fund operations.

Having adequate financial resources to fund your business can make a difference in your companies success or failure. Few mistakes are more devastating to a new business than making unrealistic assumptions about finances and the capital needs of a growing company. Simply planning ahead can help you avoid these problems.

Before funding your striping business you will need to identify all potential start-up costs. Some of these expenses will be one-time “start-up” costs such as equipment acquisition, incorporation fees, deposits, permits and licenses, etc.. These are generally non recurring costs. Some will be ongoing such as the cost of utilities, inventory, accounting fees, etc.. These expenses will be recurring and will initially need to be paid from start-up capital until the business has a positive cash flow. The goal is to establish how much money you are going to need in a checking account to fund start-up costs until business profits can take over.

Your ongoing expenses will fall into two categories, fixed and variable. Simply put, fixed costs stay the same regardless of the number of striping jobs you have going. Your telephone, power, or accounting bill is an example of this. If you were to have no striping jobs for a year you would still pay these bills. Variable costs will vary according to job volume. Paint, gas, and labor costs would be examples of this. As your job volume increases so do these costs. Keeping this in mind will assist you in setting aside enough money to accommodate growth.

As stated above, as your company grows, so does the need for working capital. Working capital is simply the amount of money that is needed in inventory and in the bank to pay bills. For example, a small striping company may need $5,000 in the bank and $1,000 in paint inventory. As that company grows it would need to increase both of these items. If a company shrinks it would require less. Oftentimes business owners are confused because they expand sales only to find that their profit is being absorbed into working capital to support the growth. Additional capital expenses, such as equipment, will also absorb profits. The thing to remember is that as growth levels out cash-flow will return to normal.

A simple way to understand how profit can go up and cash can go down is to look at a typical series of jobs. Let’s say you start a $5,000 job. You purchase paint, spend money on gas and pay your helpers. You finish the job and send then invoice to the customer. At this point you have made a profit but you actually have less cash. Let’s say that in the meantime you start three more jobs. A week goes by and the check for the first job comes in the mail. However, you have already invested the profit from the first job into the three new jobs so there is nothing left for you. After three weeks the new jobs are done and you have plenty of cash in the bank. Then you get more jobs and you have to purchase an extra striper. Also, you need to leave more cash in the bank to cover growing inventory demand. Cash goes down and you still have not taken a paycheck. This seems alarming, but it is actually a good thing. Business will eventually level out and since you have reinvested your profit back into the business you now have the capacity to take on several jobs with no need for additional capital. Finally, you can start taking a salary and draws. Think of it as walking up steps. Each step takes an effort but leaves you higher than before.

After you have considered all these things, simply make a list of your equipment needs and costs and add a few months of operational bills to that. Put together the funds necessary to cover all of these expenses and deposit them into your commercial bank account. This money is for your business and not for you to live on. You should have money for that somewhere else.

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