It’s no secret that starting a business costs money. It’s a bit of a gamble because you need to invest your money before you can make a profit. For many startups, it takes a long time before they even see a profit. And for this reason, a lot of startups fail.
To avoid these cash problems, founders need to know how much money they need to invest in order to get their business up and running. There is no exact figure to aim for, because every startup is different from others. But here we will talk about how to determine your business startup costs.
How Much Money Does Your Startup Need?
It is important to be realistic when determining business startup costs. If you underestimate these expenses, they can pile up and you may find yourself overwhelmed. Things like office space, legal fees, payroll, and other organizational expenses add up quickly. You need to be honest about how much money your startup needs.
It’s Okay to Start Small
Even if you have high expectations for your company, you can still start small. If it is your first time launching your own business, you need to be cautious about how you spend your money. After all, a lot of startups fail because they go too big too soon. Underestimating costs can cause your company’s downfall.
Blind optimism may cause you to invest too much money too quickly—only to find out there is no demand for your product. It’s smart to keep an open mind and prepare for issues that may arise later. Always start with a healthy bit of skepticism.
Understand your startup’s potential, but don’t assume that it will be successful. Businesses fail even with a solid plan and a strong product. When you’re building your company from the ground up, a million things can go wrong at any given time.
Identifying Essential and Optional Costs
In order to help your startup survive those first few difficult years, you need to invest wisely. You don’t need a huge company right away. Try to identify which expenses are absolutely necessary for your startup’s operation. If it’s not needed right now, you can go without it. This allows you to invest your money on the core needs of the business, such as your product.
Test your idea in a small, inexpensive way. Sell to your family and friends, and get their feedback. This will help you gauge your product or service’s potential. Find out what works and what doesn’t work before you even launch your business. If the test is successful, you can find out how much customers are willing to pay for your product.
By identifying which expenses are essential and which are optional, you can properly manage your business’s cash flow, both for the short and long term. Only make optional purchases as the budget allows. Wait until you have enough cash reserves for that purchase.
Another thing to consider is whether an expense is a one-time or on-going cost. There will be a lot of one-time expenses in the startup process. One-time expenses may disrupt your cash flow, so only invest in them as needed. On-going costs, on the other hand, are easier to keep track of because they don’t fluctuate much from month to month.
The most common startup expenses include: rental space for an office, office furniture, labor, basic supplies, and basic technology. You also need to pay for insurance, license, and permit fees. Later on, you will be investing in advertising and promotions once you are ready to grow your business.
According to the US Small Business Administration, most microbusinesses cost around $3,000 to start. Home-based franchises typically cost $2,000 to $5,000. Financial planning experts estimate that entrepreneurs need at least six months’ worth of fixed costs on hand at startup. This will help your company survive when your startup isn’t making money yet. One of the main reasons why small businesses fail is that they simply run out of cash.
Figure Out Your Financing Methods
Every type of business has its own financing needs. Project your company’s cash flows for at least the first three months. Add up the fixed costs as well as the estimated costs of goods. Also try to project your best case and worst case revenues to give yourself an idea of what to expect and whether or not you are hitting the mark.
If you borrow money, make sure that you know how much you borrowed and how much interest you owe. Calculating these costs can show how much you need to earn in order to keep the business viable. It also provides a clear picture of how much you need in order to keep your business afloat.
If possible, start your business without borrowing at all. Borrowing puts a lot of pressure on business owners because it leaves less room for error. Try to look for alternative funding options. How you obtain funds will affect the future of your business for years to come.
You can use personal savings, ask friends and family for financial support, take out bank and government loans, secure a grant, etc. Many companies use a combination of different sources. Most startups are self-funded.
Once you have established clients and customers, you can start growing your business and take out small business loans or look for angel investors who are willing to step in. Calculating your expenses and taking a cautious approach when it comes to investments can help your startup survive and begin making a profit.