So you’d like to start a business! The idea of being your own boss and creating a new venture that could grow and thrive is an exciting prospect.
But starting a business is hard work; especially when it comes to handling the finances. In a study from U.S. Bank, poor management of cash flow causes 82% of business failures. Therefore, it’s going to take more than just a great product or service. You’re going to need someone behind the scenes who knows what they’re doing with the money.
If you think you’re up for the job, then here’s what you need to know about how much it costs to start a business and what you can do to help it succeed.
Hos Much Do People Typically Spend To Start A Business?
There’s really no “one” answer to how much a business costs. If you look at the Internet, you’ll find lots of different answers, and most of them will depend greatly on what industry they’re pulling data from.
For example, Microsoft approximates that most start-ups cost $30,000 in their beginning stages. This is in sharp contrast to reports from the U.S. Small Business Administration which estimates that most micro businesses cost around $3,000 and home-based franchises cost $2,000 to $5,000 to start.
If those numbers sound like a lot of money to you, again, remember that some ventures require even less initial capital than that. For example, in his book The $100 Startup, author Chris Guillebeau breaks through the old-school way of thinking that says you have to be an MBA or have a rock-solid business plan to have a successful start-up. He deep-dives into 50 unique case studies of individuals who have taken $100 or less and turned their passion into a thriving micro-business.
So, in short, the answer to how much your business will cost is really going to depend on what you want to do and how you plan to go about doing it. For that, we’re going to invest some time thinking about what you’ll need to spend money on and where it’s going to come from.
How To Estimate Your Business Costs
Long before you launch your new business, you’ll want to ensure that it’s financially viable. To do that, you’re going to want to prepare a cash flow analysis.
Determine Your Expenses
The first thing you’ll need to think about are the types of expenses you’ll have. Consider the following:
- Will you lease a space or work from home? Will that require you to spend extra on utilities or carry special additional insurance?
- Do you need to obtain any licenses and permits? In addition, you’ll want to hire a lawyer and tax professional to make sure all the legal stuff is being taken care of properly.
- Do you require any special equipment such as laptops, cell phones, tools, specialized equipment, etc.?
- Do you need to build up inventory and have a place to store it all?
- Will you need to hire any employees?
- How will you promote yourself? Are you going to pay to have an awesome looking website created, or just advertise through social media? Do you need to put together any special marketing packages or work with an advertising agency?
How Much Revenue Do You Plan To Earn?
In addition to estimating your expenses, you’ll want to also research how much your product or service should be sold for. Go online to find out as much about your competition as you can. You might even want to call around to find out what prices they charge.
Once you have all of that, you’ll have to ask yourself a tough question: How much money can I realistically expect to make? Don’t sugar-coat it! Be honest and conservative in your estimates. If you shoot too high, you’ll over-inflate your cash flow analysis and make it seem like this new venture is a sure thing.
Calculate Your Cash Flow
Similar to a household budget, a cash flow analysis is really nothing more than just an estimation of the money that will move in and out of your business.
For example, you might estimate for Quarter 1 your cash flow will be:
- Revenue $50,000
- Expenes $40,000
- Profits $10,000
You could then continue this analysis into quarters 2 through 4, or even for the next several years out. You can find more detailed examples of cash flow statements here.
Do A Break-Even Analysis
Another way to look at how your business might be able to survive financially is to do something called a break-even analysis. This is just a calculation of the number of items or service calls you need to sell before your business can begin to cover its own expenses.
For example, let’s say your new business has $5,000 of fixed costs per month. You make products that sell for $100 each, but each one carries a variable cost of $50 to make. In this case, your break-even calculation would be as follows:
$5,000/($100 – $50) = 100
In other words, you’d need to sell a minimum of 100 items before your business can effectively break even. Once you start selling items above this quantity, you’ll be turning a profit.
Get Financing If Needed
[IMAGE: 03 how to calculate startup costs for small business.jpg]
It’s not that uncommon for businesses to show little to no profit when they’re first getting started. If it looks like you’re going to be in the red for a little while until you start to generate a sustainable amount of revenue, then you might need to look into getting some financing or a loan.
Here are a few good options to try:
- Nonprofit community development finance institutions (CDFIs)
- Venture capitalists (VCs)
- Angel investors
- Crowdfunding (services like Kickstarter and Indiegogo)
- Peer-to-peer (P2P) lending (such as Lending Club)
- Government grants (usually for science or research businesses)
- Loans for minority-owned businesses
Of course, no one is going to give you a loan just because you asked for one. Be prepared to demonstrate that you intend on running a legitimate business by formally preparing the cash flow analysis we discussed earlier.
In addition, these organizations might also be interested in your business plan. Here’s some advice from the US Small Business Administration on how to write one.
Seek Guidance From Other Business Owners
No one ever said you have to start a business alone. There are lots of agencies that offer excellent resources such as education and business mentorship.
Here are a few you can look into:
- SCORE: SCORE is a nonprofit association dedicated to helping small businesses grow through education and mentorship.
- Small Business Development Centers (SBDC): A federal agency devoted to promoting entrepreneurship, small business growth, and the US economy.
- Minority Business Development Agency (MBDA): A federal agency tasked with promoting the growth and competitiveness of minority-owned businesses.
If you’re looking for more knowledge on how to start a business, you may also enjoy our guide to the six best books on starting a business. Now you know, financially, what it’ll take to start your business. Get out there and make your business a success!