Starting a business? Make these 7 financial calculations before investing

These seven financial calculations will help you make an initial assessment of your business idea and identify which assumptions need further validation. They are simplified financial models, not guarantees of success. Start with reasonable, well-founded assumptions and validate them against actual quotes, market tests, and customer feedback.

1. Startup capital

How much money do you need before making your first sale?

Startup capital includes all the payments required to prepare and launch your business, such as equipment, furniture, website development, deposits, permits, initial inventory, and other setup costs.

Startup capital = Total planned payments before launch

Example:
– €3 000 for equipment
– €1 000 for a website
– €2 000 for initial inventory
Total: €6 000 in startup capital.

Here, we calculate actual cash payments rather than accounting expenses. Equipment purchases and refundable deposits require immediate cash outflows, even though they are treated differently for accounting purposes. The €6 000 covers only the period before the business launches. The costs of operating the business after launch must be planned separately.

2. Fixed costs

How much will you have to pay even if you make no sales?

Fixed costs are expenses that do not directly depend on the number of sales. Examples include rent, software subscriptions, accounting services, and fixed salaries.

Monthly fixed costs = Total monthly fixed expenses

Example:
€600 for rent
€200 for software and accounting
€1 200 for employee compensation, calculated as the total cost to the business, including employer social security contributions
Total: €2 000 per month.

Make sure to include compensation for your own work. Many first-time entrepreneurs overlook this expense, only to discover later that their business does not generate enough income to cover the true value of their time and effort. If you do not plan to pay yourself initially, record your intended compensation as a future target. However, do not confuse it with actual cash payments in your cash flow plan.

Remember that “fixed” does not mean permanent. As your business grows, you may need additional employees or larger premises. When that happens, your fixed-cost calculations will need to be updated.

3. Contribution margin per sale

How much does each sale contribute toward covering your fixed costs?

Your selling price is not your profit. Every sale involves variable costs, such as products, materials, packaging, shipping paid by your business, commissions, and transaction fees.

Contribution per sale = Net selling price – Variable costs per sale

The net selling price is the price after discounts and excluding VAT if your business is VAT-registered. If your business is not VAT-registered, the VAT you pay to suppliers represents an actual cost and should be included in your calculations.

Example:
€50 net selling price – €20 variable costs = €30 contribution per sale

Each sale contributes €30 toward covering your fixed costs. Once your total contribution exceeds your fixed costs, your business begins generating an operating profit.

4. Customer Acquisition Cost (CAC)

How much will it cost you to acquire one new customer?

Customer acquisition involves expenses related to advertising, content creation, sales teams, commissions, and other marketing and sales activities.

CAC = Total customer acquisition costs ÷ Number of new customers acquired

Example:
€300 in acquisition costs ÷ 20 new customers = €15 per customer

Make sure you match acquisition expenses with the customers those expenses were intended to attract. Also, consider the time between running a marketing campaign and the customer’s actual purchase. Before launching your business, CAC is only an estimate. Once you start testing your marketing activities, update your calculations using real data.

If the contribution from a customer’s first purchase is €30 and acquiring that customer costs €15, you have €15 remaining to cover other expenses, provided those acquisition costs have not already been accounted for. However, this does not mean you have made a €15 profit. Be careful not to count the same expense twice. For example, if your marketing specialist’s salary is already included in fixed costs, you should not deduct it again through CAC when calculating profitability. If you expect customers to make repeat purchases, estimate how many additional purchases they are realistically likely to make, when those purchases may occur, and how much contribution each purchase will generate.

5. Break-even point

How many sales do you need to cover your operating costs?

The break-even point is the level of sales at which your business covers its operating costs without making a profit or a loss.

For a single product or service:

Required monthly sales = Monthly fixed costs ÷ Contribution per sale

Using our previous example, with €2 000 in fixed costs and a €30 contribution per sale: €2 000 ÷ €30 ≈ 66.67
This means you need at least 67 sales per month to break even.

If you add a fixed monthly advertising budget of €300 that has not already been included in your fixed costs: (€2 000 + €300) ÷ €30 ≈ 76.67
In this case, you would need at least 77 sales per month.

You can also calculate the break-even point in terms of revenue. The contribution margin ratio is 60%: (€30 ÷ €50) × 100 = 60% Therefore: €2 000 ÷ 0.60 ≈ €3 333 in monthly net revenue. However, since you cannot make a fraction of a sale, you would actually need 67 sales at €50 each, generating €3 350 in revenue.

This formula assumes that the selling price, variable cost per sale, and fixed costs remain unchanged. If your business sells multiple products, the calculation must account for the expected sales mix. The formula also does not include taxes on profits.

After calculating your break-even point, ask yourself two important questions: Can my business handle this sales volume? What evidence do I have that I can actually achieve these sales? Also, remember that covering your monthly operating costs does not mean you have recovered your initial startup investment.

6. Operating working capital

How much money is tied up in your business before customers pay you?

You might purchase inventory today, sell it a month later, and receive payment even later. During this period, some of your money is tied up in the business.

A simplified calculation is:

Working capital (Funds tied up in the operating cycle) ≈ Inventory + Accounts receivable – Accounts payable

Where:
Inventory: Products or goods you currently hold in stock, valued at their purchase cost.
Accounts Receivable: Money your customers owe you but have not yet paid.
Accounts Payable: Money you owe your suppliers but have not yet paid.

Example:
€2 000 inventory + €1 000 accounts receivable – €800 accounts payable = €2 200
If all your customers pay immediately, your accounts receivable will be zero.

This calculation provides a snapshot at a particular point in time. It is not a complete estimate of all the cash your business will need. Advance payments, taxes, and other financial obligations can also affect your funding requirements. When calculating your total funding needs, be careful not to count initial inventory twice if it has already been included in your startup capital.

7. Cash runway

How long will your money last?

After launching your business, it may take several months before incoming payments are sufficient to cover outgoing payments. Your cash runway provides an estimate of how long your available cash can cover this shortfall. First, calculate how much more money leaves your business than comes in each month:

Monthly cash shortfall = Cash outflows – Cash inflows

Cash outflows include all payments made by the business, such as fixed and variable expenses, taxes, social security contributions, loan repayments, and equipment purchases. Cash inflows are the payments you actually receive from customers during the month, not amounts customers still owe you.

Example:
Suppose your business makes approximately 17 sales per month at €50 each during its initial months.
Cash inflows: 17 × €50 = €850
Cash outflows: €2 000 fixed costs + (17 × €20 variable costs) = €2 340
Monthly cash shortfall: €2 340 – €850 = €1 490, or approximately €1 500 per month.

This example excludes advertising expenses and assumes that customers pay immediately. Fixed costs are paid during the same month, while variable cash payments amount to €20 per sale, including the replenishment of sold inventory. Initial inventory levels are maintained. Next, calculate your cash runway:

Cash runway ≈ Available cash reserves ÷ Expected monthly cash shortfall

Example:
If you have set aside €9 000 in available cash reserves and your monthly shortfall is €1 500: €9 000 ÷ €1 500 = 6 months
This means your available cash could cover approximately six months of operating shortfalls.

The €9 000 is separate from the startup expenses you have already paid.

This formula is only an estimate. It assumes that the monthly shortfall remains relatively stable and that no additional external financing is received. If cash inflows equal or exceed cash outflows, your available cash does not decrease. Even a profitable business can run out of cash at a particular moment, for example, when customers delay their payments. For a more accurate financial plan, prepare a month-by-month cash flow forecast.

What if sales grow more slowly than expected?

Once you have prepared your initial financial forecast, test how your business would perform under less favorable conditions.

For example:
– 30% fewer sales than expected
– 15% higher variable costs per sale
– Customer payments delayed by 30 days

These are illustrative scenarios. Choose scenarios that reflect the realities of your business and evaluate each one separately before testing their combined impact.

What if you make no sales at all?
In this case, your cash inflows would be €0, while your cash outflows would consist only of fixed costs of €2 000 per month. Your monthly cash shortfall would therefore be €2 000. With €9 000 in available cash: €9 000 ÷ €2 000 = 4.5 months This means your cash reserves would last approximately four and a half months. Add any payments that have not yet been included in your fixed costs, such as loan repayments or taxes, and recalculate. This is a highly pessimistic scenario, but it is worth considering. Ask yourself whether you have enough financial reserves to handle such a situation and which expenses you could reduce or postpone if sales develop more slowly than expected.

Will you have enough money? Will you need additional financing? Which expenses can you postpone?

The most important assumption to validate is: Are there enough customers willing to pay your price? Running an advertising campaign can help measure interest, but pre-orders and actual purchases provide much stronger evidence of genuine demand. Use the results of these tests to adjust your pricing, expenses, and financial forecasts before making larger commitments or investing additional time and money.