One reason why having a business plan is an essential step for starting any business it to answer the critical and fundamental question of how much money you will need to get your business venture started. If you have no idea of your business startup costs, you will probably not know how long you will need to bootstrap and the amount of funding you will need. In simple terms, without calculating your business startup costs, you mostly don’t know where you are going, or how you will get there. In fact, your business could collapse even before hitting your breakeven point.
Most entrepreneurs believe that calculating startup costs are about listing and tallying all their cash outlays. Although this is an essential step, calculating business startup costs is not a simple exercise. Before you can set the ball rolling, you will need first to understand the types of expenses your business will have, and they are outlined below.
Understanding the Types Of Costs
There are numerous types of expenses you should consider when starting up any business. It is equally important that you differentiate the different types of costs so as to properly manage your cash flow for the short term as well as the long run. Here are the kinds of costs that new business owners must consider:
One-time and recurring costs: In most cases, one-time expenses are often relevant during the startup process, like expenses for incorporating your company. And if there is a month when you will need to make a one-time accessory purchase, the money going out of your business will probably be more than what is coming in. This implies that your cash flow shall be disrupted for that period and you must make up for it later. Ongoing expenses, on the other hand, are regularly disbursed, and they often include utility payments. They usually don’t fluctuate as much from time to time.
Essential versus optional costs: Expenses that are an absolute necessity for the growth and development of your company are known as essential costs. Optional costs include optional purchases which can only be done if the budget permits.
Variable versus Fixed Costs: Variable costs often depend on the direct sale of services or products while fixed expenses, like rent, are usually consistent from one month to the other. It should be noted that fixed costs could eat up a large chunk of revenue at the beginning, but as your business scales up, their relative burden slowly becomes negligible.
Having familiarized with the different business startup costs, here is how to calculate your costs.
- Pinpoint Your Milestones
To establish the main milestones of your business, you must assess your current position and where you would like to be. You cannot start identifying your costs if you are not aware of what you would want to achieve. What are the crucial milestones for your business to reach? Some of the most probable milestones could be to gain a better understanding of the marketing or get the first product. It is advisable to create discrete milestones instead of bundling them together.
- Determine What You Will Need To Reach Your Milestone
After identifying your milestones, you should focus on the resources required to achieve these milestones. Here is what you need to consider.
- Human Resources: This is usually one of the most significant startup expenses. Think of who you will need to build your business and calculate the estimated wages and salaries, not forgetting taxes, recruiting, and employee benefits among other human resource costs.
- Operational Costs: These are usually the day-to-day costs needed to keep your business in operation, and it includes things like office supplies, equipment supplied, and inventory expenses.
- Professional Services: You will also need to include the cost of crucial professional services like an attorney or accountant. Also, take into account what licenses or permits you might need.
- Facilities: Determine everything you will require regarding facilities building for sale in PA or office space.
- Marketing: Your business will not be successful unless people have heard about it, so be sure to factor in the cost of your marketing materials.
- Consider Your Funding Sources
Next, you will need to establish whether you will bootstrap your entity or whether you need to/want to/can raise capital. And to do this, you will need to calculate your business burn rate, the capital you’ll go through each month, using total expense calculation. And if you discover that you might need to raise money to cater for your monthly costs, look for potential funding sources. This could include family, friends, venture capitalists, and angel investors.
- Set a Funding Goal
There are advantages and disadvantages associated with every funding source, but there is no ideal source for all businesses. It all boils down to your business niche, the stage your business is in and other aspects you could be looking for. Besides, it also depends on the amount of money you need. While you could think that more money is better, the truth is that this could be a huge mistake. Always use your expense calculations as a basis for determining the funding you require. Be sure to add some cushion since most startups often underestimate their costs, but do not add too much as well. Just raise what you need, no excess.
- Balance Your Business Milestones Against Funds
After determining what you require to achieve your milestone, you must get back to the drawing board and balance against the available funds. For you to reach every milestone, you need to balance between what you can afford and what you can do. This is typically not a one-time process and in you will often find yourself swinging between the two points.
Admittedly, you will be in for surprises as you startup and scale and that is why you do not want to start your business with a five-year financial plan. It is quite impossible to make such a projection. Instead, calculate your initial startup costs and create a budget that you will continuously update quarterly. Starting with a reasonable estimate of all projected costs will put you in a better position to wire a good business plan and build a successful business.