Start Up Business Capital Loans – How much 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.
Launching a successful business requires preparation. And while you may not know exactly what those expenses will be, you can and should start doing your research and estimating how much it will cost to start your business.
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Start-up costs are expenses incurred before the business is up and running. These are the invoices and expenses you will need to cover before launching your business. While each business will need to factor in specific startup costs, your business will typically be located in a brick-and-mortar, online, or service-based organization.
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Like your business plan, estimating your startup costs is part of building a roadmap for your business. Having even a ballpark estimate can help you avoid unnecessary risk and stay on track during the more volatile months.
Still not convinced you should explore your startup costs? Here are a few more reasons why you should calculate your startup expenses.
Every industry and business requires vastly different expenses, which means there is no simple formula for calculating start-up costs. But that doesn’t mean you can’t make a guess that accurately reflects your business needs.
A SaaS company, for example, may need to account for additional online tools or server costs to keep their site up and running. But a clothing store, physical or online, will have to account for physical inventory and shipping costs.
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Many people underestimate startup costs and start their business in a haphazard and unplanned way. This may work in the short term, but is usually much more difficult to maintain. Managing start-up costs is nearly impossible until you calculate them accurately, and clients are often wary of new businesses with improvised logistics.
Your financial plan is an overview of current business finances and growth estimates. Having realistic startup costs, even if they are just estimates, is one of the key elements in building a workable financial plan. Understanding what it takes to start your business can help you:
To take advantage of your financial plan successfully, you will need to constantly review it throughout the life of your business. Having these early start estimates will provide you with a baseline that you can refer to during these reviews. After a few months of running, you’ll know if your estimates are realistic or if you need to make any adjustments.
Investors and lenders want to understand the roadmap you have for your business. You will need to be prepared to answer questions about your business model, sources of income, growth forecasts, and start-up costs. They need to see that your business is viable and that you have fully explored what it takes to get started, operate and grow.
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Having realistic startup costs laid out is a must in this case. And being able to show how you think expenses will change or stay similar over time will give them a better idea of how you intend to run your business.
Just like when you develop your business plan or forecast your initial sales, it’s a combination of market research, testing, and informed 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 spend 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 vendor relationship or a common expense that you can avoid based on your business model.
Now, that may leave you wondering, how do I really estimate realistic startup costs for my business? Start by making these three simple lists.
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These are startup expenses or costs that occur before you launch and begin to generate revenue. These should be divided into one-time and ongoing expenses. By separating them this way, you can get a more accurate estimate of what it will take to launch your business. Here are some common expenses to consider in both categories:
These make up just a handful of the potential costs you’ll need to consider. Some will remain fixed, some will operate 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 better track your spending and identify any natural cost-cutting 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’s a reason why you should separate costs into assets and expenses. Expenses are deductible from income, so they reduce the tax base. Assets, on the other hand, are not deductible from income.
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By initially separating the two, you potentially save money on taxes. Plus, by accurately accounting for expenses, you can avoid overstating your assets on the balance sheet. While having more assets generally looks better, having assets that are worthless or unfounded only inflates your books and potentially makes them inaccurate.
Listing them separately is good practice when starting a business and leads to the final piece to consider when determining startup costs.
Cash requirements are an estimate of how much money your new business needs to have in its checking account when it starts. In general, your cash balance on the start date is the money you raised as investments or loans minus the cash you spend on expenses and assets.
This is the last piece of the puzzle you will need to get started. As you build your plan, look at your cash flow projections. If your cash balance falls below zero, then you need to increase your financing or reduce spending.
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Many entrepreneurs decide they want to raise more cash than they need to have money left over for contingencies. While that 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 may see experts who recommend having between six months and a year of expenses covered, with your starting cash. That’s nice in concept and would be great for peace of mind, but it’s rarely practical. And it interferes with their estimates and dilutes their value.
For a better estimate of what you really need in your starting cash balance, calculate the deficit spending you’re likely to incur in the first few months of business. From there, calculate how much cash you’ll need to move forward until you break even several months and even years after opening.
Now that you have your possible assets, expenses, and start-up cash, it’s time to put them all together to estimate your total start-up costs. There are two potential methods you can use to develop these estimates.
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The more traditional method, which I call the worksheet method, is to create separate worksheets for start-up costs and start-up financing.
The most innovative, which we use in our LivePlan software, simplifies this with ongoing expense estimates, asset purchases, and financing to manage cash flow as an ongoing process. Each option is valid, so let’s dive into how to perform each method.
The traditional method uses a startup worksheet, as shown in the illustration below, to plan your startup funding. The example here is for a bicycle retail store. It includes lists of start-up expenses on the top left, start-up assets on the bottom left, and start-up funding on the right.
The total startup costs in this example are $124,650, the sum of expenses ($3,150) and assets ($121,500) required before lunch. The financing plan, to 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 that include a business loan of $17,650, a promissory 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 initial costs and the other shows where the money will come from.
Also note that assets include $35,000 in cash and bank account. That estimate, in this example, comes from the example shown above, which calculates the need for $25,708 in initial cash. Instead, the businessman estimates $35,000 to have a damper.
Remember, the worksheet covers what happens before launch. Excludes ongoing sales, costs, expenses, assets, and post-launch financing.
This sample worksheet shows an estimate of $3,150 in expenses incurred prior to go-live. That’s your initial loss at the start, which means these expenses can be deducted from income later for tax purposes. This loss may look bad on the surface, but it’s pretty normal for startups. In fact, it’s financially beneficial, since having expenses to deduct from future taxes reduces your tax bills.
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