New entrepreneurs are a hearty, impressive group of people. Typically full of enthusiasm, optimism, and a willingness to do whatever it takes, they will jump into their new adventure sure of many things, unsure of a few others, and sometimes with an unwillingness to admit the difference.
And while that can-do attitude is great to have when you leave a job and start a new business, some things simply cannot be overcome by sheer force of will, and one of those things is the nitty-gritty analysis needed to figure out just how much it is going to cost to get your new venture up and running.
This info is critical to know because:
- It will establish how much money you need to raise before you get started
- It will help you figure out a budget and timeline for getting to profitability
So, just what are those startup costs actually going to entail? They can roughly be broken down into two broad categories: Assets and Expenses. Let’s look at each:
1. Assets: You need to make a list of what you will need to buy to launch this business, and then estimate (to the best of your ability) what each one of these assets will cost. For example, if you are going to start a nail salon, you will need to account for the cost to build the stations, purchase the nail polish and other inventory, the cost for signage, and so on.
Assets businesses might find on this list include:
- Computers and printers
- Office supplies
- Desks, chairs, filing cabinets, office furniture
- Product packaging
2. Expenses: There are two types of expenses to account for when you start a business – one-time startup expenses and ongoing expenses. For this analysis of startup costs, they need to be treated differently:
- Legal and accounting expenses
- Licenses and permits
- Website creation
- Remodeling / decorating
- Marketing, advertising, and related materials
- Debt repayment
- Utilities, Internet, phone
- Salary of owner
Once you have all of these numbers, the real trick is figuring out how to put them together in such a way that you really know what it is going to cost to get started.
The first few categories are pretty straightforward. Simply come up with a grand total for the assets you need to buy, as well as for your one time-expenses. For the sake of argument, let’s say that assets will run you $10,000, and that your one-time expenses are $10,000 too — $20,000 total.
The real trick is that last category – ongoing expenses. A good rule of thumb is that it will take you at least six months after you begin your venture to start turning a profit. Of course, it could be more or less, but that’s a good figure to play with as that is how long it may take to market and advertise your business, get some customers, generate income, and get paid.
As such, you need to estimate what your ongoing expenses will run you for the first six months. Let’s say that it will cost $5,000 a month to run your business. That means that your startup expenses will break down like this:
Purchase of assets: $10,000
One-time expenses: $10,000
Six months ongoing expenses: $30,000
$50,000 is how much money you will need to open the business, outfit it, and have enough money in reserve to pay yourself and keep the doors open until you turn a profit roughly six months later.
Word of warning: Don’t underestimate these numbers. One of the worst things you can do is start a business and run into a cash crunch a couple of months down the road because your forecast was too rosy. Be conservative.
About Steve Strauss
Steven D. Strauss is one of the world’s leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest,The Small Business Bible, now out in a completely updated third edition. You can listen to his weekly podcast, Small Business Success, visit his new website TheSelfEmployed, and follow him on Twitter. © Steven D. Strauss.