Don’t let inaccurate capital calculation be the reason why your business fails. Follow 2 golden rules to get it right

You’ve got a great idea, you’ve made a business plan, assembled a team but hit a road block and can’t move ahead because you have no money. Lack of capital is the single biggest reason most entrepreneurs don’t see their dreams become a reality. Even if you find a source of funding, many businesses fail because they didn’t ask for the right amount and consider capital calculation.

Deciding how much capital you need doesn’t only mean calculating internal expenses but analyzing the market and environment outside your business. While you can’t anticipate everything, you can follow two golden rules to make sure you get the right amount in capital calculation.

In the Cerius Business Today podcast, we spoke to two distinguished CEO’s about their experiences in raising capital and their advice for new entrepreneurs and small businesses in capital calculation. They shared their experiences and tips on ways small businesses they’ve managed succeeded in funding and reaching their goals.

1. Don’t make assumptions.

One of the most common mistakes entrepreneurs make is asking for the wrong amount of money. Giving a ball park figure to investors will create problems for everybody involved. Overestimating it will reflect badly on your pitch if you can’t support the amount and create problems in justifying a high valuation. On the other hand, underestimating it will leave you without money before reaching investor deadlines and goals.

Jeff Greenberg is a serial entrepreneur with 25 years of experience in the high-tech community and with technology based startups. He shared his biggest lesson from his experience as a CEO and working with other CEOs raising capital: know how much capital you need, if any. Do your homework in calculating and understanding how much you really need and why. Not only does it help you plan better, but it creates a much more compelling story to potential investor.

“I find today that most entrepreneurs default to saying I need to go raise some money without really thinking it through,” he says. “When they sit down sometimes they realize they don’t need any or sometimes they come to the conclusion that they need much more or much less than they thought. The only way you could do that is by really thinking through the business model and creating a financial projection. It isn’t really that difficult if you just take a little bit of time to sit down, and then thoroughly understand what you’re really going to need to get to your objectives.”

2. Account for the unexpected

Running a business doesn’t always go according to plan and you might stumble into some unforeseen circumstances. Those circumstances can be costly and put a large dent into your budget. While nobody can predict the future, you can anticipate changes in the business environment through research and financial projections.

Kevin Gibbs has been with four startups from angel funding to the final sale of the company and has worked with turnaround companies. He has sold four startup companies and raised over $40 million in VC funds. The most common pitfalls he has seen businesses encounter is underestimating the capital they think they needed.

“I often find when I’m talking to people or looking to raise money is they often underestimate the amount of money they need,” says Kevin. “Simply because you don’t know exactly what you’re going to be doing, you don’t know where the market’s going to take you, you don’t know how quickly you’re going to grow. You don’t know what else is going to happen. So often they find that if they need 600 or need a million, they’ll probably need more money than that in the end because you don’t know what you don’t know.”

Kevin advises that entrepreneurs focus on the market space, technology and the staff. Without considering the complexities of the marketplace, you are guaranteed to be wrong in your estimation. Startups are treading in unchartered territory and the usual rules don’t always apply to them. You need to anticipate expenses from every direction by analyzing the business environment from every angle.

As Kevin rightly says, “The unexpected is called the unexpected for a reason. That’s why it’s a startup, you don’t know exactly what’s going to happen to your company.”