Financing A New Business Start Up – What will it cost to start your business? It’s hard to know for sure, but it’s important to start planning early to avoid unexpected expenses.
Starting a successful business requires preparation. And while you may not know exactly what those expenses will be, you can and should start researching and estimating what it will cost to start your business.
Financing A New Business Start Up
Start-up costs are expenses incurred before the business is up and running. These are the bills and expenses you will need to cover before launching your business. While each business will need to consider specific start-up costs, your business will generally fall under either a brick-and-mortar, online, or service-based organization.
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Just like your business plan, estimating your start-up costs is part of building a road map for your business. Even having a rough estimate can help you avoid unnecessary risk and keep you on track during more volatile months.
Still not convinced you should explore your startup costs? Here are a few more reasons why you should calculate your startup costs.
Each individual industry and business requires very different expenses, which means there is no simple formula for calculating start-up costs. But that doesn’t mean you can’t make an educated guess that accurately reflects your company’s needs.
For example, a SaaS company may need to pay for additional online tools or server costs to keep its website running. But a clothing store, brick and mortar or online, must factor in physical inventory and shipping costs.
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Many people underestimate start-up costs and start their business in a haphazard, unplanned manner. This may work in the short term but is usually much more difficult to maintain. Dealing with start-up costs is almost impossible until you calculate them correctly and customers are often wary of brand new businesses with makeshift logistics.
Your financial plan is an overview of your current business finances and estimates for growth. Having realistic startup costs, even if they are just estimates, is one of the key parts of building a sustainable financial plan. Understanding what it takes to start your business can help you:
To successfully leverage your financial plan, you must review it consistently throughout the life of your business. By having these early starting estimates, you will have a baseline to refer to during these reviews. After a few months of operation, you will know if your estimates are realistic or if you need to make some adjustments.
Investors and lenders want to understand the roadmap you have in place for your business. You must be ready to answer questions about your business model, revenue sources, growth projections and initial start-up costs. They need to see that your business is profitable and that you have thoroughly researched what it takes to start, run and grow.
Signs Your Startup Or Small Business Is Ready For Funding Or Financing
Having realistic start-up costs determined is a necessity in this case. And being able to show how you think expenses will change or stay the same over time will give them a better idea of how you intend to manage your business.
Like developing your business plan or forecasting your first sale, it’s a mix of market research, testing and educated guesswork. It is up to you to adjust accordingly based on actual results over time.
If you need a starting point, look at your competitors and industry benchmarks for specific spending categories. You don’t want to directly copy the expenses you find, but confirm whether your estimates make sense based on current market factors. You may find that you have a competitive cost advantage based on a healthy supplier relationship or a shared cost that you can avoid based on your business model.
Now you may still be wondering, how do I actually estimate realistic startup costs for my business? Start by making these three simple lists.
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These are expenses or upfront costs that occur before you launch and start bringing in any revenue. These should be divided into one-off costs and ongoing expenses. By separating them this way, you can give yourself a more accurate estimate of what it takes to start your business. Here are some common expenses to consider in both categories:
These makeups are just a handful of the potential costs you have to consider. Some will remain fixed, others will act as variable costs, and some may switch between the two over time. By having them outlined this way from the start, you’ll be able to keep better track of your expenses and identify any natural cost-saving options over time.
These are costs associated with long-term assets purchased to start your business. While cash in the bank is the most basic startup asset (and we’ll talk more about that later), there are a few other common assets you may need to invest in:
Now there is a reason why you should divide costs into assets and expenses. Expenses are deductible against income, so they reduce taxable income. Assets, however, are not deductible against income.
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By first separating the two, you potentially save yourself money on taxes. By accurately reporting expenses, you can also avoid overestimating your assets in the balance sheet. While it usually looks better to have more assets, having assets that are useless or unsubstantiated only bloats your books and makes them potentially inaccurate.
Listing these separately is good practice when starting a business and leads to the final piece to consider when determining start-up costs.
Cash requirements are an estimate of how much money your startup business needs to have in its checking account when it starts. Generally, your cash balance on the start date is the money you raised as investments or loans minus the money you spend on expenses and assets.
This is the last piece of the puzzle you need to get started. As you build your plan, look at your cash flow projections. If your cash balance falls below zero, you must increase your financing or reduce expenses.
Jump Start Your Business
Many entrepreneurs decide they want to raise more money than they need so that they have money left over for contingencies. While it makes sense when you can do it, it’s hard to explain to investors. Outside investors don’t want to give you more money than you need, because it’s their money.
You can see experts recommend covering anywhere from six months to a year of expenses with your seed money. It’s nice in concept and would be good for peace of mind, but it’s rarely practical. And it interferes with your estimates and dilutes their value.
For a better estimate of what you really need in your startup cash balance, calculate the deficit spending you’re likely to incur in the first few months of business. From there, estimate how much money you will need going forward until you break even several months and even years after opening.
Now that you have your potential assets, expenses, and startup cash, it’s time to add them all together to estimate your full startup costs. There are two possible methods you can use to develop these estimates.
Start Up Financing
The more traditional, which I call the spreadsheet method, involves creating separate spreadsheets for start-up costs and start-up funding.
The more innovative one we use in our LivePlan software simplifies this with rolling estimates for expenses, asset purchases and financing to manage cash flow as a continuous process. Each option is valid so let’s dive into how to perform each method.
The traditional method uses a startup spreadsheet, as shown in the illustration below, to plan your initial financing. The example here is for a bicycle shop. It lists startup costs on the top left, startup assets on the bottom left, and startup funding on the right.
The total start-up costs in this example are $124,650, the sum of expenses ($3,150) and assets ($121,500) required before lunch. The financing plan on the right shows that the owner plans to invest $25,000 of his own money and $99,650 in loans. The loans include a long-term loan of $70,000 and other loans including a commercial line of credit of $17,650, a note of $2,000, and other current debt (probably credit card debt) of $10,000.
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Notice the balance here. One side shows the start-up costs and the other shows where the money comes from.
Also note that the assets include $35,000 in cash and bank account. That estimate, in this example, comes from the example above, which calculates the need for $25,708 in initial cash. The contractor estimates $35,000 instead of having a buffer.
Remember that the worksheet covers what happens before launch. It does not include ongoing sales, costs, expenses, assets and post-launch financing.
This spreadsheet example shows an estimated $3,150 in pre-launch expenses. It’s your initial loss when you start, meaning these costs can be deducted against income later, for tax purposes. This loss may look bad on the surface, but it is quite normal for start-ups. In fact, it’s financially beneficial, as deducting expenses from future taxes reduces your tax bills.
Finance For Every Stage Of The Business Lifecycle
LivePlan suggests another and probably more
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