Should a New Business be Well Capitalized?

That depends on the business you want to peruse in . Not all new business & startup require a large capital. If you are opening a Burger King franchise it will be wise to stick to the suggestions of the franchisor who would probably recommend 6 months to a year worth of burn. Having that kind of safety net what we would call a well capitalized start-up

How would you calculate the burn rate. It is relatively simple. You take all expenses, like rent, payroll etc. and add them up. You will get your monthly total cost of having the business. Assuming that you make no revenues, you need to have this much in the bank to survive for a month. So for a 6 months burn rate would be 6 times that amount.

However you would start generating some revenue, in case of a Burger King in the first month. That money will lower your burn rate so you would need somewhat less than we described above.

Different kind of businesses will require different burn rate. Some even none. If you are starting an Android apps developer business in your bedroom you really do not need to be capitalized. As long as you have something you eat and your bills are payed you should be fine. Once your app starts selling you are already a profitable enterprise. Congratulations! First steps are successful.

The rule of thumb should be that you estimate your 6 months burn rate and have that much in the bank. However as we discussed in a different article it is good to have tight cash positions for a start up. It makes one think and come up with innovative solutions.

When one runs into a problem in business a solution has to be found. Usually there are multiple solutions for a problem. Throwing money at it is just one of them and anyone can do that. You really do not need any brains to achieve that.

But when one is tight with funds the option of just throwing money at the problem is not the best.
In this case one should start examining the other possible solutions. And usually there are many. By picking one of them will make the organization more creative and less reliant on money that can be usually very tight.

So in conclusion, have some money in the bank to cover burn rate, but be prepared not to spend it. Come up with innovative solutions. it will really help in the long run.