Getting A Handle On Business Start-Up Costs
Start-up costs are the expenditures required to get a business up and running, and even see it through the first few months of operation when things might be a bit rough and unpredictable. One reason many new businesses fail is because they did a poor job of estimating start-up costs. As a result they end up cutting corners that negatively impact the launch, or they run out of operating funds and simply can’t keep the doors open. Even if you’re buying into a low cost franchise, properly estimating start-up costs can be the different between success and failure. Perhaps even more so if you are trying to get a business off-the-ground with limited financial resources.
Get Real With Your Start-Up ExpensesOf course, every situation is different, so it’s impossible to provide an exact itemized list of start-up costs. However, we can note the areas you need to consider while putting together you start-up cost estimate. Brainstorm each category and try to come up with a comprehensive list that applies to your situation. When finalizing your list, be sure to use realistic, real world numbers that estimate the cost to have proper, professional work done. Do some research if needed. Resist the urge to use “blue sky” numbers to keep the total low. There is a real danger in drastically underestimating the needed start up funds. Better a realistic high number than an unrealistic low one. And don’t assume you can get all the legal work for free because your girlfriend’s uncle is a lawyer (or whatever). Get your business off to a solid start by doing things the right way. Legal and Administrative: Opening a business almost always requires both time and money to get all the right paper work. If you are buying a franchise, then the franchise fee could also go under this heading. Other typical costs would include: lawyer fees for incorporating or partnership agreements; state/local license fees and incorporation/LLC fees, inspection fees, and insurance. Property: Almost every business needs a space to operate - whether it’s a brick and mortar storefront or a virtual place on the web. Both cost money. What will it take to get your space set up? Even if you are leasing there might be improvements or changes needed to accommodate your business that you will be responsible for providing, and you might have to put down a substantial deposit. If you are buying a property, then be prepared to come up with a 20% down payment as part of your start up costs, plus any needed improvements to the property. Be sure to think about everything related to your business space that is needed to open, like utility connections, signage, and so on. Remember, be realistic! Equipment: What you need will depend on what your business does. Some business can launch by just buying a few phones and computers. Other businesses will need expensive capital equipment like a fleet of vehicles or industrial tools. List everything you need to buy to start your business. Remember to include things like Point of Sale equipment, business management/accounting software or software licenses, and furniture. Starting Inventory: Businesses like retailers, restaurants, and distributors rely on moving inventory to make a profit. Generally, that inventory has to be in place on day one. What will it take to fully stock your business with what you need? Don’t forget consumables like paper goods and cleaning equipment. Advertising: While advertising will probably be an on-going cost after start-up, launching a business successfully is something to take very seriously. How do you plan to get the word out and how much will it cost? Labor: Businesses often hire employees and put them on the payroll before the doors open to help set-up the business and stock inventory as well as for training. How will staff be brought on during the start-up?
Start-Up Costs Include Early OperationIf you carefully review these categories you will probably come up with a pretty good list of your startup expense. Be sure to consider any miscellaneous expenses that do not fall into these categories like freight or travel costs. Finally, most experts recommend that operating funds for the first three to six months are included in the start up costs. At a minimum, this would include enough to cover rent/loan payments, labor costs, and utilities. Businesses need some time to get rolling. You don’t want to fail before you even get started. Enjoy this article? You've got time for another! Check out these related articles:
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- How To Start Your Own Business As A Recent Grad