Starting a business can be an exciting process, but it costs money. When determining the costs of starting a company, it's important to be realistic. Things like office space, legal fees, payroll, business credit cards, and other organizational expenses can really add up. If you're thinking about launching a new business, you should understand the initial costs you might face.
This is the amount of cash you'll likely need to start your business. Drew Gerber, CEO of public relations firm Wasabi Publicity, estimates that an entrepreneur will need six months of available fixed costs when starting the company. When planning your costs, don't underestimate expenses and remember that they can increase as the company grows, Gerber said. It's easy to overlook costs when thinking about the big picture, but you need to be more precise when planning your fixed expenses, he added.
In fact, underestimating costs can decimate your company, says Cynthia McCahon, founder and CEO of the business plan software company Enloop. You can use the downloadable SBA PDF to calculate initial costs. Chances are, you have high expectations for your company. However, blind optimism can cause you to invest too much money too quickly.
In the beginning, it's smart to keep an open mind and prepare for problems that may arise later. McCahon said business owners should start with some healthy skepticism. One-time expenses will be relevant especially in the process of creating a company, such as the costs of setting up a company. If there's a month when you have to buy equipment for one time, it's likely that the money you leave will be more than the money that comes in, Shinar said.
This means that your cash flow will stop that month and you'll have to make up for it the next month. Ongoing costs, on the other hand, are paid on a regular basis and include expenses such as utilities. These usually don't fluctuate as much from month to month. Essential costs are expenses that are absolutely necessary for the growth and development of the company.
Optional purchases should be made only if the budget allows. The following table calculates the basic fixed costs of a hypothetical start-up company with five employees. Variable costs will depend on the situation of each company and are not included in this table. Another fundamental aspect of financial planning for a startup company is projecting the company's cash flow.
William Brigham, director of the New York Small Business Development Center in Albany, advises startup owners to project their cash flow for at least the first three months of the company's life. He said that not only fixed costs should be added up, but also estimated asset costs and revenues at best and worst. This is an essential step in maintaining the financial health of your company. If you're not realistic about your cash flow and debts, you won't be able to get your business off the ground, especially as other costs start to add up.
Gerber recommends starting a business without taking out any type of loan, if possible. He said that loans put a lot of pressure on any business and its owners, as they leave less room for error. Do your best to explore all of your funding options. If taking out a loan is your only option, work closely with your lender to ensure that your company can meet the commitment financially.
Keep in mind that, when it comes to small businesses, personal assets are also often at stake. According to Herndon Davis, mortgage loan officer and real estate agent for Mortgage Real Estate Services, most startups are self-financing. As you've learned before, the money you'll need to start your business depends on several factors. Opening a physical store with an expensive rent that requires high-quality equipment can cost hundreds of thousands more than offering independent services online with no initial investment.
Before starting your business, analyze your potential costs and determine if you are financially prepared and committed to the business path you want. For example, if you're creating an online store or standalone service, you probably won't have a lot of upfront costs. If you're interested in starting your own small business, you might be wondering how much money you need. However, any company can carefully analyze business expenses and reduce costs that are not necessary for the company's immediate success.
Companies can save on initial costs by reducing business expenses for additional income or they can opt for a business loan or credit card with lower eligibility requirements focusing on personal credit score when applying for it. Accepting that your first year of business activity may not be very profitable is important for both financial planning and mental preparation. Business owners can also apply for an initial loan that provides them with available cash needed to manufacture products or expand their operations. By keeping costs low, you'll get most return on investment in business products and services. Try dropshipping model or sell digital products or start print-on-demand business as you don't need to maintain inventory. Don't put yourself in situation where you're so dispersed that you can't manage your business in sustainable way.
