1. How much money do you really need?
2. What will you be spending that money on?
3. How, exactly, are you coming up with that number?

Even if you’re bootstrapping, you’re not off the hook.

Answering these questions helps to ensure that you have enough access to cash (also known as working capital or liquidity) to keep your business afloat until you become what I call “reliably profitable.” I say “reliably” because a single month or quarter isn’t enough time to guarantee that you’re on solid enough financial footing to be self-sustaining.

Where to start…

To answer these questions, you first need to build realistic financial projections using the standard spreadsheets I covered in Financial Projections Explained (Even If You’re Not a Numbers Person). Specifically, you’re going to need the Sources & Uses of Funds.

It shows:

• All the cash coming into your startup from loans, investments and grants (and from whom)
• How you plan to use that cash (by type or category)

The Sources & Uses of Funds will not only provide this information, but just as importantly, show that you’ve done your homework, which is a fantastic way to make sure you’re taken seriously. Gold star for you!

Why this spreadsheet is different from the others.

When you look closely at the 5 main spreadsheets startups use for their financial projections, you’ll see that the Sources & Uses of Funds is different from the all the others in one important aspect:

It’s the only spreadsheet that relies on information from other spreadsheets.

Specifically, you need to complete your Cash Flow Projections and Equipment List first. Then you can begin work on your Sources & Uses of Funds.

So let’s go over what you need to know to build this spreadsheet the right way, so you’ll have all your ducks in a row when you start asking for money.

First off, avoid this common mistake.

An unfortunate but common error many entrepreneurs make is including startup costs* in their profit and loss (P&L) and cash flow projections. Doing this is a problem because it distorts your financial picture.

The P&L relies on your estimated revenues and expenses to show your startup’s profitability, whereas cash flow projections rely on those same estimates to show your startup’s ability to pay its bills. Both are essential tools when it comes to setting your prices as well as budgeting. Including startup costs in these spreadsheets will throw your financial picture out of whack because they’re not part of your daily operations.

For example, money received from investors or other funding sources is not revenue. In fact, funding has nothing to do with measuring sales, which is what revenue is meant to show. And startup costs, such as building your website, buying a delivery van or hiring a consultant to write your business plan, have nothing to do with your daily operating expenses.

That’s why we use the Sources & Uses of Funds spreadsheet.

*When I refer to startup costs, I mean the one-time expenses you incur before you begin your normal daily operations.

Here’s what the Sources & Uses of Funds tells you:

Done right, a Sources & Uses of Funds will show you how much cash you’re going to need to:

1. Launch your business.
2. Cover your expenses until your startup is generating enough cash to cover its own expenses… or reach the next round of funding.
3. Raise from investors, borrow from lenders or budget for yourself if you’re planning to bootstrap.

What goes in the “Sources” section.

In the Sources section you’re going to list everyone who is providing the startup funds that you need. Regardless of whether you’re planning to find outside investors, secure a loan, use your own money or some combination, this part of the spreadsheet has to show all the sources of funding for your business.

You’ll need to list each one on its own line, including the source’s name along with the amount they are investing or loaning to you.

SOURCES:

Founder Contribution: Suzy Q.                         $xxx
Founder Contribution: Andre M.                       xxx
Investment from Tony Smith:                              xxx
Investment from XYZ Ventures:                        xxx
Total Sources:                                                           $xxx

When you’re completing this section, make sure not to leave out anything, including money coming from friends, family, co-founders or yourself, if you’re using your own money.

After each source is listed, you’ll total them up to determine the sum of all incoming funds. Then you’re ready to move on!

What goes in the “Uses” section.

The Uses section includes two different categories:

• Startup costs
• Working capital

1. Startup costs.

In the first category, you need to consider all of the expenses you’ll incur before you launch your business. This includes things like a website, furniture, equipment, legal fees, consultant fees, grand opening expenses and more.

Each category should be listed on its own line of the spreadsheet. For example, you’ll have one line for furniture, one for equipment, one for consultant fees and so on.

Reminder: If you need to purchase equipment for your startup — things like machinery, display cases, a delivery van, etc. — you’ll need to create a separate Equipment List spreadsheet where the individual items are listed in detail, along with delivery and installation fees, sales tax, etc. Then you put that total in the Uses section.

USES:

App Development                                                    $xxx
Business Plan                                                                 xxx
Equipment                                                                       xxx
Legal                                                                                    xxx
Grand Opening                                                             xxx
Inventory/Supplies                                                    xxx
Website                                                                            xxx

Cash Needs for 17 Months of Operations   xxx
Cash Reserve for Contigencies                          xxx
Total Uses:                                                                  $xxx

Now we’ll look at the next thing you have to account for in the Uses section…

2. Working capital.

This category refers to the amount of cash you’ll need to bridge the gap until your business is generating enough cash to fund itself and become self-sustaining.

This number will appear as its own line item labeled “Cash Needs for ___ Months of Operations.”

Of course, to figure out how many months it will take to become profitable, you’ll have to refer back to your Cash Flow Projections. That’s why you need to prepare them before tackling your Sources & Uses of Funds.

To estimate when your business will be “reliably profitable,” take a look at the bottom two lines of your Cash Flow Projections spreadsheet. They show the cumulative beginning and ending cash on hand each month.

Find the month when the negative numbers become consistently positive. However many months it is from when you start your business, that’s the number you’ll use to fill in the blank of “Cash Needs for ___ Months of Operations.”

Finally, I recommend adding an additional line labeled “Cash Reserve for Contingencies.” It’s always smart to have a small cushion to cover any surprises that crop up.

Two important points about the Sources & Uses of Funds:

1. The totals have to match.

In other words, Total Sources needs to equal Total Uses. This isn’t my rule, it’s an accounting rule.

If there’s a significant difference between Total Sources and Total Uses, then there’s something important missing in one of the sections. It’s important for you to find and fix any discrepancies.

It’s especially important to do this before showing your numbers to other people. If your Total Sources and Total Uses don’t match up, it’s a red flag to banks and potential investors that you don’t understand your financials.

If, on the other hand, your two totals are close but not exact, I tweak the Cash Reserves line item slightly — and I do mean slightly — to make the numbers match.

2. Double-check that your financial projections are realistic and credible.

You’ll know you’ve done things right when you’re confident that you can defend your assumptions if an investor or banker dives in and asks how/where/why you chose the numbers you did. Pro Tip: It’s not really about the numbers per se, it’s about the thinking behind the numbers that they’re testing you on.

Helpful reading and resources.

For more information on the financial spreadsheets mentioned in this article, take a look at my DIY Business Plan Kit. It goes into far greater detail on the five main spreadsheets you need for your business plan, and includes Excel templates with some formulas already built in.

Also take a look at The Difference Between Profit & Loss and Cash Flow Projections to get a better understanding of how each of those spreadsheets works. And if all of this numbers talk is new to you, be sure to take a look at Financial Vocabulary for People Who Hate Numbers.

Last but not least, if you’d like help putting together your financial projections — as well as learning how to use them so that you can take charge and feel comfortable changing things as you move forward — consider working with me one on one (see more details here).