How Much Do You Need To Start Your Own Business – How much does it cost to start your business? It’s hard to be sure, but it’s important to plan ahead to avoid unexpected expenses.
Starting a successful business requires preparation. And while you don’t know what those costs will be, you can and should start researching and calculating how much it will cost to start your business.
How Much Do You Need To Start Your Own Business
Start-up costs are the costs incurred before starting a business. These are the taxes and expenses you need to cover before starting your business. While every business must estimate specific start-up costs, your business is usually based on a brick-and-mortar, online, or service-based organization.
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Like your business plan, estimating your startup costs is part of creating a road map for your business. Even a rough estimate can help you avoid unnecessary risks and stay on track during more volatile months.
Still not sure if you should examine your startup costs? Here are some other reasons why you should consider your startup costs.
Each industry and business requires very different costs, which means there is no simple formula for calculating startup costs. But that doesn’t mean you can’t get an educated estimate that accurately reflects your business needs.
For example, a SaaS business may charge additional online resources or server costs to maintain its site. But a brick-and-mortar or online clothing store must consider physical inventory and shipping costs.
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Many people underestimate the start-up costs and start a business haphazardly and unplanned. This may work in the short term, but maintenance is usually much more difficult. Start-up costs are nearly impossible to manage until you calculate them accurately, and customers are often wary of new businesses with ad hoc logistics.
Your financial plan is an overview of your business finances and growth estimates. Having realistic startup costs, even if they are just estimates, is one of the key elements of creating a viable financial plan. Understanding what it takes to start your business can help you:
To use your financial plan successfully, you will need to review it continuously throughout the life of your business. Having these basic starting calculations will give you a baseline that you can refer to in these reviews. After a few months of activity, you’ll know if your assumptions are realistic or if you need to make any adjustments.
Investors and lenders want to know what roadmap you have for your business. Be prepared to answer questions about your business model, revenue streams, growth projections, and initial start-up costs. They need to see that your business is viable and that you have carefully studied what it takes to start, operate and grow.
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Having realistic initial costs is essential in this case. And showing how you think costs will change or stay the same over time will give them a better idea of how you plan to run your business.
Just like developing your business plan or forecasting your initial sales, it’s a mix of market research, testing, and educated guesswork. It’s up to you based on actual results over time.
If you need a starting point, look at your competitors and industry benchmarks for specific spend categories. You don’t want to directly copy the costs you find, but confirm that your calculations make sense based on market factors. You may find that you have a competitive cost advantage based on healthy vendor relationships or shared costs that you can avoid based on your business model.
Now this might make you wonder how do I actually calculate the actual costs of starting my business? Start by making these three simple lists.
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These are the costs or upfront costs that occur before you start working and start making any income. They should be divided into one-time and fixed costs. By ranking them this way, you can give yourself a more accurate estimate of what you need to start your business. Here are some common costs to consider in both categories:
This decoration is only part of the potential costs that you should consider. Some remain fixed, others operate as variable costs, and others may shift between the two over time. By defining them this way from the start, you can better track your costs and identify natural opportunities to reduce costs over time.
These are the costs associated with long-term assets to start your business. While cash in the bank is the most important starting asset (and we’ll talk about that later), there are other common assets you should invest in:
Now there is a reason you need to separate expenses into assets and expenses. Expenses are deducted from income, therefore reducing taxable income. On the other hand, assets are not deductible from income.
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By keeping the two separate, you’ll save yourself some tax. Additionally, by keeping accurate expense records, you can prevent your assets from exceeding your balance sheet. While it’s generally better to have more assets, having worthless or irrelevant assets will only clutter your books and potentially make them inaccurate.
Listing them separately is good practice when starting a business and leads to the last section to consider when determining startup costs.
A cash requirement is an estimate of how much money your startup should have in its checking account when it starts up. Generally, your cash balance at the start date is the amount you have accumulated in investments or loans, minus the cash you spend on expenses and assets.
This is the last piece of the puzzle you need to get started. Watch your cash flow projections as you develop your plan. If your cash balance falls below zero, you may need to increase your financing or reduce your expenses.
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Many business owners decide that they want more cash than they need so that they have money left over for contingencies. While this is a good idea, it can be difficult to explain to investors when you can do this. Outside investors don’t want to give you more money than you need because it’s their money.
You can see experts recommend covering six months to a year of expenses with your initial cash. It’s a good concept and would be good for peace of mind, but it’s rarely practical. And this hampers your accounts and reduces their value.
To better estimate what you need for your starting cash balance, you calculate the operating expenses you’ll likely incur in the first few months of business. From there, figure out how much cash you’ll need until you hit a solid break-even point months or even years after opening.
Now that you have your assets, expenses, and potential cash, it’s time to add them together to calculate your total startup costs. There are two possible methods you can use to make these calculations.
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The traditional one, which I call the worksheet method, involves creating separate worksheets for start-up costs and start-up financing.
The innovation we use in our LivePlan software makes this easy with advanced costing, asset acquisition and financing estimates to manage cash flow as a seamless process. Both options are valid, so let’s consider how to do each method.
A traditional method of planning your startup financing is to use the startup worksheet shown in the image below. An example here is for a bicycle retail store. It shows startup costs on the top left, startup assets on the bottom left, and startup funding on the right.
Total start-up costs in this example are $124,650, the sum of costs ($3,150) and assets ($121,500) needed before lunch. The financing plan to the right shows that the owner plans to invest $25,000 in cash and $99,650 in debt. Debt includes $70,000 in long-term debt and other debt, including a business loan of $17,650, $2,000 in other current debt (probably credit card debt) of $10,000.
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Consider the balance here. One side shows the start-up costs and the other shows where the money is coming from.
Note that assets include $35,000 in cash and a bank account. This calculation, in this example, is derived from the example above, which calculates an initial cash requirement of $25,708. Instead of a buffer, the entrepreneur calculates $35,000.
Remember that the worksheet covers what happens before the work begins. It does not include current sales, costs, expenses, assets and financing since the beginning of operations.
This example worksheet shows an estimated cost of $3,150 before starting. This is your start-up loss, which means that these costs can be deducted from your subsequent income for tax purposes. This loss may seem bad on the surface, but it is very normal for a new business. In fact, it’s financially beneficial because future tax-deductible expenses lower your tax bill.
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