If you have your mind set on starting your own business, you need to understand how much money is required. Many a promising entrepreneur fails because they don’t understand what is needed during the initial lean years. Taking the time to realistically calculate startup costs helps you identify shortfalls and assists in the creation of a successful business plan—one that will recruit investors and acquire necessary funding.
Avoid depending too heavily on credit so you can create a strong credit history, providing even more access to the money required before you start turning a profit.
Here’s how to calculate your startup costs accurately:
Use an Expenses List
Depending on the type of business you are starting, you could face bills before you are set up to serve customers. To prepare for these inevitable costs, look at your expenses. Expenses vary greatly based on the business type:
- Brick and mortar
- Online
- Service providers
While each business has expenses unique to its type, has its own expenses, the following list of expenses is a good start:
- Office space
- Equipment and supplies
- Communications
- Utilities
- Licenses and permits
- Insurance
- Lawyer and accountant
- Inventory
- Employee salaries
- Advertising and marketing
- Market research
- Printed marketing materials
- Website design
Cross off the list any item that doesn’t apply, and add any expenses unique to your business.
Use Estimates and Defined Costs
It is almost impossible to have exact costs for all expenses; however, where prices are firm, such as the cost to acquire the proper permits and licenses, your figures can include exact amounts. In many cases, such as salaries and rent, you will have to depend on estimates. Conduct research to establish realistic averages to include in your list of expenses. Determining averages is easier for costs such as inventory you plan to sell, supplies required to produce a product, or equipment to run your office or provide a service.
One-Time Expenses vs. Monthly Expenses
Some items on your list will be one-time expenses; others will be monthly or ongoing. Divide your list into two sections to determine initial costs to keep them separate from those in place once your business is operational. For example, if you are paying cash for equipment, it is a one-time cost; but if you rent the equipment or have to pay it off over the next few years, the cost is ongoing cost.
Upfront costs, such as building your website or logo design, are one-time fees, whereas the monthly cost to host your website is ongoing. Don’t forget to include utilities, such as internet and electricity, if you have a brick-and-mortar business. Keep in mind many one-time expenses are often tax-deductible, which can help offset the capital required upfront.
One-Time Expenses vs. Monthly Expenses
Some items on your list will be one-time expenses; others will be monthly or ongoing. Divide your list into two sections to determine initial costs to keep them separate from those in place once your business is operational. For example, if you are paying cash for equipment, it is a one-time cost; but if you rent the equipment or have to pay it off over the next few years, the cost is ongoing cost.
Upfront costs, such as building your website or logo design, are one-time fees, whereas the monthly cost to host your website is ongoing. Don’t forget to include utilities, such as internet and electricity, if you have a brick-and-mortar business. Keep in mind many one-time expenses are often tax-deductible, which can help offset the capital required upfront.
Estimate When You’ll Need Capital
Using your two lists, you can create a timeline or calendar to begin estimating startup costs. Here you should consider the terms of payments for items like equipment. You want to ensure your schedule goes at least as far out as those terms. Salaries are also important. For example, if you figure you will need to hire additional staff as your customer base grows, salary costs may double at the six-month mark.
Your calendar will list estimated monthly costs and expenses, and record anticipated changes over a 12-month period. Combine all expenses to calculate how much money you will need upfront, and then determine your monthly expenses. Add everything up so you know how much capital is needed for at least the first year.
Arrange for Funding
Once you have a good understanding of your startup costs, use them to estimate when you might require further funding. Your startup costs should be recorded in an easy-to-view report that you can share with investors and lenders. You also want to include revenue projections so those you approach for funding can compare your expenses and revenue.
Offering potential funders a clear picture of when expenses might be reduced and profitability increased will make it easier for them to decide if they wish to provide you with capital.
