There's no way you can start and build a successful small business if you don't have the funds to back it up. Yet so many first-time business owners greatly misjudge the amount of money they'll need to get their business off the ground. That's why so many new businesses fail. You may think you have a pretty good ballpark estimate, but that's not good enough. You need a detailed map with solid, well-researched numbers.
The first thing you need to do is figure out exactly where your costs are coming from. There are two different kinds of costs—initial costs and ongoing costs. Initial costs are one-time expenses that are needed to set your business in motion. Ongoing costs are those expenses that you anticipate paying again and again (could be weekly, monthly, annually, etc.). Start by making a list of ALL your initial costs, no matter how small or insignificant.
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It's not enough to consider how much a large piece of machinery costs. You also need to think about the costs involved with transporting it or setting it up. Everything needs to be accounted for!
Now do the same with your ongoing costs.
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Figure out exactly what maintaining your business will cost you on a month-by-month basis. When you review your monthly financial statements, you'll be able to gauge whether you're on track and if adjustments need to be made.
Now that you have a tally for both types of costs, add extra money to each and consider this miscellaneous. Extra unforeseen costs are always going to come up, so you want to be prepared for them.
What you should have now is a total for your initial costs and a total for one month of ongoing costs. Take your one-month total and multiply it by six. It is generally recommended that you have enough cash on reserve to keep your business going for six months. Some might recommend a full year, but make sure you prepare for at least a six-month period.
Many of the expenses that you will incur can be difficult to gauge. That's why you need to do sufficient research. The best way to start is to talk to people who have already started similar businesses. You obviously won't want to approach direct competitors, but talking to related businesses or businesses in a different geographic area might be helpful. Trade associations can also be a wealth of information. Many have startup packages that can help you in calculating your startup expenses. Suppliers, manufacturers, distributors—they're all excellent resources for figuring out costs. Call them and tell them that you're planning to start a business and are looking for costs. Ask about things like bulk-buying discounts, startup inventory packages, credit terms or anything that might lower your cost. Make sure you contact several sources to get an accurate picture of these costs. You can also always check out websites or libraries for information.
There is no one-stop-shop type of resource for accurately researching startup costs, but as long as you keep digging and ask plenty of questions along the way, you'll eventually come up with accurate numbers. The thing that you need to remember is that good research is invaluable. It can tell you whether your business idea is financially feasible and give you a better picture of what your place is in the market.
When you actually get your final tally, you may be surprised by how expensive a startup can be. This may even prompt you to review your expenses and slash the things you can live without. Talk to an established business owner to see what suggestions he or she might have for bringing your numbers down to a more manageable level.
