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How Much Money Do You Need To Start Your Own Business
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Many entrepreneurs start their business with little more than a dream and an exorbitant budget. In fact, some business models require very little upfront cost, and in 1995 I witnessed the success of countless entrepreneurs with humble beginnings. But more than a third of small businesses that start and don’t last long attribute it to a lack of cash.
? And do aspiring entrepreneurs have the wrong idea of what those costs will be in the first year of business? In October, we surveyed 150 business owners and 300 small business owners across the United States to find out just that.
According to our research, small business owners spend an average of $40,000 in their first year of business.
We also asked our respondents to take it a step further – we asked them to look back at their first year’s records and tell us how much money they allocated to various business expenses as a percentage of their total budget. For simplicity, we’ve broken down the following functionality and cost categories.
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It is important to note that the amount spent by companies in their first year varies widely depending on factors such as industry and business model; whether the business was full-time, part-time or a hobby; and whether the business had additional employees. But more on that later.
While new entrepreneurs rely on personal savings to support their business in the early days, one-third of respondents reported reinvesting the proceeds from the sale of their business to cover business expenses in the first year.
Recognizing that the first year of your business may not be very profitable is important for financial planning and mental preparation. Many founders are paid last in the first year because all of the company’s revenue goes back into the business. This is absolutely normal.
For businesses struggling to make sales in their first year, having a detailed financial plan for how much you need and how you’ll use it can make applying for or trying to get a small business loan easier. attract investors.
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Don’t think of it as debt: start-up costs are necessary to generate income, so the return on investment will exceed the initial costs.
Not surprisingly, having employees significantly increases total costs. If you decide to go the self-employed route, you can spend less than a third of what an employee-owned business costs.
In addition to fixed costs, entrepreneurs noted common costs incurred in the first year and warned to be aware of hidden costs.
Fixed costs and fixed costs are only part of your financial plan: hidden costs, one-off costs and variable costs must also be calculated in advance. What if an unexpected event (eg, a pandemic, recession, or both) throws your imagination off course? It’s always a good idea to plan for contingencies and have a cash reserve.
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When we asked aspiring entrepreneurs how much they expected their first year of business to cost, they overestimated one thing: They expected online costs to be more expensive than established businesses reported.
Entrepreneurs who expect to spend more to start a business may end up paying more than they should. The rationale is simple: if companies plan to spend more on a service, the amount they are willing to pay for that service increases accordingly.
The cost and complexity of starting and growing an online business is a barrier to entry for many aspiring entrepreneurs. But this is fundamentally unfounded. Our core principle is to enable entrepreneurs with no coding or design skills to set up an online store. And to do so at an affordable price.
Our research backs this up: Of the 300 companies surveyed, we found that customers spent an average of $38,000 in their first year, while non-customers spent an average of $41,000 in their first year.
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Just because an entrepreneur managed a certain budget in the first year doesn’t mean it was right. Indeed, most of our respondents admitted that, in retrospect, they would have spent their money differently in the first year.
To better guide aspiring entrepreneurs, we decided to take a closer look at the businesses that reported higher revenues in the first year and see what decisions contributed to their financial success. Here’s what I found.
Companies that reported higher revenue in the first year spent more on team expenses, accounting for nearly a third of their total budget.
The relationship between team income and expenses may seem obvious: if you make more money, you can pay yourself and hire employees. But this relationship goes both ways: adding more members to your team can lead to increased revenue.
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While going it alone has some early business advantages, it should be noted that this approach has limits. When you’re a solopreneur, you have limited resources: they start with you and end with you. You are limited by the skills you have and the skills you are willing to learn.
Many entrepreneurs reach a critical stage in their careers where they must weigh the financial costs of hiring help versus the time required to do it themselves.
It’s important for business owners to look for red flags that indicate it’s time to seek help. Some red flags include giving up because you can’t keep up, looking at the quality of your products or services, your sleep quality, or mental health issues.
Don’t spread yourself so thin that you can’t support your business.
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We asked business owners, “What percentage of your total budget is marketing?” when you are asked. We found a significant relationship between marketing spend and revenue.
In general, the less money a business makes, the more it spends on marketing. And the reverse was true: the more money a business made overall, the less it spent on marketing.
If you’re spending too much money on marketing without a clear ROI, it could be an early sign of bigger problems, like a website that isn’t converting. It is imperative that companies monitor, report and review their marketing efforts on a regular basis.
However, marketing is more of an art than a science and getting the budget right can be difficult. Spend too little and you won’t put your brand in front of buyers; You are unlikely to spend too much money and lose results.
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Based on our findings, as well as those from the US Small Business Administration, marketing budgets for early-stage B2C businesses range from 7-12% of revenue.
Again, the cost of starting a business varies widely and depends on many different factors such as the industry you operate in, your business model, team size, cost of goods and more. Ultimately, there is no right or wrong amount of money to spend in the first year, it’s how you spend what you have.
However, after studying the trends of high-grossing businesses and consulting startup consultants, it is recommended that you spend in every expense category in the first year.
Remember: starting a successful business is a marathon, not a sprint. That’s why it’s important not to measure the success of your new business by the first year’s profits. Give yourself 18-24 months to take off. In the first year of your online store, use the budget guidelines above to experiment, iterate, and invest sales into your business.
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Being an entrepreneur requires a certain appetite for risk. But with the right information and a clear understanding of your financial goals, you can avoid many of the financial mistakes new entrepreneurs make. And with the right e-commerce platform, all the other moving parts are much easier to manage.
*All 2020 startup costs are based on data from a survey of 300 US small business owners and 150 aspiring entrepreneurs in October 2020. All values are rounded averages. All data is unaudited and subject to adjustments. Unless otherwise stated, all financial figures are in US dollars.
Many businesses can be started with little or no money. Try starting a low-cost fashion, digital, or print-to-order business because you don’t have to keep inventory. Any business you can start from home will save you money so you can increase its growth.
The answer depends on the type of business
