If you've already done research on how to get started, what your market looks like and what you plan to do with your business, now's the time to figure out how much it will cost and how you’re going to pay for it. Every business requires spending before even opening the doors on the first day. Along with these expenses, you need to estimate your ongoing costs of operation. Cost estimates will be your basis for setting prices and rates, analyzing your profitability, and applying for loans, so it's important not to overlook anything.
Know Your Initial Costs
Your startup costs are purchases you make and fees you pay to get your business up and running. You'll encounter different costs depending on what type of business you're running. Brick-and-mortar stores are very different than service providers or online stores, so talk to others in the industry for their experiences. There are several types of small business costs:
- One-time costs, like down-payments, office equipment and furnishings, and building a website
- Ongoing costs include payments you have to address on a regular basis, like rent, loan payments, utilities, and salaries
- Variable costs, such as emergency repairs, marketing campaigns, and legal fees
Once you have a list of what you expect to spend money on, do your best to find out how much these things actually cost. Some expenses, like rent, will be easy to determine, but you may have to estimate some other costs. Look online and keep communication open with other people working in your industry.
Understand Your Assets
An asset is a tangible resource belonging to your business that still has value after a year or more. Some assets increase in value over time and some decrease over time, and most require an initial investment.
Examples of assets include:
- Cash: The money your business has in the bank, usually representing the owner's personal investment in the company
- Land and buildings: Any property the business owns and from which it operates
- Improvements: Money spent fixing up the location, such as painting, putting in new flooring, repaving the parking lot, or doing interior redecorating
- Office furniture: Desks, tables, chairs, shelving, and small appliances fall into this category
- Equipment: These costs vary depending on the type of business you’re starting. For example, operating a restaurant requires investing in more large equipment than running a retail store.
- Starting inventory: If your business sells a product, you should include the money you need to spend on stocking your initial inventory.
Money brought into the business by investors or through loans also counts as an asset. However, since you have to make payments on these sources of financing, they also count as expenses and should be categorized along with similar types of payments. Knowing what assets your business already has can make it easier to take out a business loan or pitch to investors later in the game. Once you're up an running, it can be wise to get an appraisal of your assets for lenders who will want to see that you have the means to put down collateral.
Know Your Recurring Costs and Overhead
You also need to calculate the monthly cost of doing business for at least the first 6 months, possibly up to a year. Without this calculation, you may have trouble covering your expenses until you start generating a consistent stream of revenue, which can take time to build up. Anything requiring a monthly payment, including rent, utility bills, payroll, and loan payments, counts as a regular cost of doing business. To ensure you can meet these payments, take the time to create detailed cash flow projections based on current market conditions.
What Startup Cost Estimates Do For You
The sum of your startup and recurring costs tells you approximately how much money you need to get your business off the ground. Once you have this estimate, start planning how you’re going to finance the start of your business. You may discover you need a business loan to stay afloat during the initial phases of startup, and this additional cost should be factored into your projections. Using financial planning software or working with a financial advisor can help you keep everything straight. Expect to take a loss at the start, but keep a careful eye on cash flow to ensure the overall trend progresses in an upward direction as your business starts to grow.