How do I determine my startup cash needs and funding sources?

"How much money do I need?" Entrepreneurs frequently face this question when planning a new business startup. Too little, and you risk running short of cash and derailing your venture before it even gets started.

Overestimating your needs has drawbacks too, as a higher amount may necessitate additional debt with its associated costs. Though the surplus may be put to good use elsewhere in the business, the extra liability could still weigh down your balance sheet at a time when you want to be running as lean as possible.

Good budgeting and financial planning can help any small business right-size its funding needs. But how can a startup with no experience make the most accurate projections possible?

Former building materials industry executive and veteran SCORE counselor Lou Davenport, recommends using SCORE's free spreadsheet templates with built-in formulas to prepare pro forma forecasts for the first three years of operation. The spreadsheets include expense categories for startup and ongoing operations, enabling the user to plan for each step of the transition into a sustainable small business.

"Once you learn how to use them, it's much easier to do 'what-if' scenarios and compare the results," Davenport says. You can then use the first-year projections as your budget, and track things as you go along."

In making startup financial projections, Davenport recommends paying particular attention to balance sheets and cash flow forecasts.

"For example, you may determine that $30,000 will get a business started," he says. "But if it takes a year and a half to break even, it may well take another $30,000 to reach that point. Not recognizing and planning for these situations is a serious error."

Once you've determined your startup's financing needs, you can identify the best source(s) for acquiring it. Many entrepreneurs rely on their own savings, while others look to their local banks for SBA-backed business loans. There are several other options to consider as well:

• Angel investors and venture capital firms: These are individuals or groups who lend money or acquire an ownership interest in a small business. Investors are looking for the potential of rapid growth and high returns so you most likely will be required to provide a business plan and financial projections.

• Credit cards: Though convenient, credit cards usually have high interest rates that can be costly. If you're a sole proprietor, missed payments could damage your personal credit standing.

• Friends and family: Another convenient source, but loans of this nature should be wisely structured and documented to avoid damaging your personal relationships.

• Crowdfunding: This is an Internet-based method where you pitch your small business ideas to a cooperative pool of potential investors. While this source is becoming increasingly popular it has limitations and currently lacks regulatory protections against fraud so research and proceed carefully.

• Grants: No federal program provides "free" money solely to start a new business. However, check into state and local-level programs as they may help offset certain costs (e.g., office and production space, investing in energy-efficient technologies). Locating a business in a designated enterprise zone or one undergoing economic revival may also earn tax credits and reduced rates for rent and utilities.

• Fox Valley SCORE provides free

confidential mentoring to clients in 17 locations throughout DeKalb, DuPage, Kane, Kendall, McHenry and Will counties. If you need help with existing business challenges, or are thinking about starting a new business, visit our website and click the red "Book Now" button. You can also click on "Workshops & Events" to register for one of the many free workshops throughout the year. The website is: http://foxvalley.score.org/