“Of course, you want more revenue, but what good is it if it isn’t predictable?”
– Aaron Ross: Author or Predictable Revenue
You need to be realistic about how much money you can make with your business, and how much money it is going to take for you to get started. Countless entrepreneurs go into this stage of planning completely blinded by optimism. Optimism is great – it really is – but the reality is not contingent on your hopes. So, ask yourself: ‘How much money is it going to take to get my business operational?’
Look at every aspect of your startup costs down to ink cartridges for your office printer if that’s something you’ll need. Knowing how much you need, how much you can put down, and what you’ll ask a potential investor or financier for, is vital. It is the only way that you’ll be able to assure investors that you’ve done your due diligence. Moreover, it will let you know how soon you can really start turning a profit.
Calculate your business startup costs before you launch!
The key to a successful business is preparation. Before your business opens its doors, you’ll have bills to pay. Understanding your expenses will help you launch successfully. Even if you have a bit of money saved away and you feel like you can launch the first phase of your business comfortably on your own, you need to know what it is going to cost you. If you skip this crucial step, you’ll find yourself running out of cash and out of steam within the first couple of months of launching – if not, the first couple of weeks. Calculating startup costs helps you:
- Estimate profits;
- Do a breakeven analysis;
- Secure loans;
- Attract investors;
- Save money with tax deductions.
You wouldn’t just climb behind the wheel of your car without knowing where you’re going. What if you run out of fuel along the way? Are there any gas stations where you’re headed? Do you have the right car for the terrain you’ll be driving on? I think you see where I am going with this. So, as a rule of thumb, know before you go. In this case, know your startup expenses. Let’s have a look at the breakdown of this step in the next subsection.
Identify your Startup Expenses
Most businesses fall into one of three categories: brick-and-mortar businesses, online businesses, and service providers. Brick-and-mortar businesses are conventional business models. Importance is placed on in-person interactions, as well as in-store sales. Online businesses will have a broader target audience because they won’t necessarily be limited by servicing the needs of people in their immediate surroundings. Now, these businesses might sell a physical product – shipping it to their customers, or a digital service – selling said services online. In some instances, they may very well sell both. Service providers will be strictly service-based businesses.
Why is all of this information important? Well, for starters, you’ll face different startup expenses depending on your business type.
There are common startup costs you’re likely to have no matter what. Look through this list, and make sure to add any other expenses that are unique to your business.
- Office space;
- Equipment and supplies;
- Utilities;
- Licenses and permits;
- Insurance;
- Lawyer and accountant;
- Inventory;
- Employee salaries;
- Advertising and marketing;
- Market research;
- Printed marketing materials;
- Developing a website.
Estimate your Monthly Expenses
Once you have your list of expenses, you can estimate how much they’ll actually cost. This process will be different for each expense you have.
Some expenses will have well-defined costs — permits and licenses tend to have clear, published costs. However, you might have to estimate other costs that are less certain, like employee salaries. That being said, you can always do a bit of research in terms of what the industry averages are for each of the employees you intend on hiring. Websites like Glassdoor and Payscale are great resources to get the proverbial job done. Look online and talk directly to mentors, vendors, and service providers to see what similar companies pay for expenses.
As a word of advice, it’s always best to overstate your expenses slightly while understating your potential revenue. This allows for a worst-case scenario view of your figures, giving you the breathing room to adjust as you begin operations.
Add Up All of these Expenses for a Full Financial Picture
Once you’ve identified your business expenses and how much they’ll cost, you should organize your expenses into one-time expenses and monthly expenses.
One-time expenses are the initial costs needed to start the business. Buying major equipment, hiring a logo designer, as well as paying for permits, licenses, and fees are generally considered to be one-time expenses. You can typically deduct one-time expenses for tax purposes, which can save you money on the amount of taxes you’ll owe. Make sure to keep track of your expenses and talk to your accountant when it’s time to file your taxes.
Speaking of which, don’t underestimate how complex your bookkeeping can be in the early stages of running a business. Even if you feel like you’ve got a good handle on accounting principles, bring in an expert to help you get started. One thing is for certain if you try to wear all the hats in your business, and do all of the work by yourself, you will make an innumerate amount of mistakes. Not only that, but time will get away with you, and you will wind up burning out very early on. There are marketing professionals, accounting professionals, and all other manners of astute business personnel for a reason: these are full-time jobs. You simply cannot do it all. Well, not for very long, anyway.
Now, monthly expenses typically include things like salaries, rent, and utility bills. You’ll want to count at least one year of monthly expenses but counting five years is ideal. Tallying up your expenses for a projected period of five years doesn’t mean that you are going to be vying for financing for the full five years right away, but it will give you a good indication of the intervals at which you might need a cash injection. Add up your one-time and monthly expenses to get a good picture of how much capital you’ll need and when you’ll need it.
Use your startup cost calculations to get startup funding!
It’s a good idea to create a formal report of your expected startup costs. You want it in a format that’s clear and easy to understand. Investors and lenders compare expected costs to projected revenue and determine the potential for your business to profit. Remember, these are professionals that have seen hundreds, if not thousands, of business plans and financial forecasts. You cannot dupe them by trying to overshoot your revenue potential. Be realistic with yourself and realistic with those figures. Otherwise, you’ll be wasting precious time and resources developing a financial plan that is just going to get tossed to the side.
Up next, you will need to determine your winning, or losing factors. Knowing which of these factors are internal and external and, therefore, which are fully within your control, will help you create decisive plans for moving forward. Let’s get straight to it.
