- Calculate the costs you need to launch your startup or accomplish a business goal
- For those starting a business or expanding a business
- Learn how to request funding, attract investors, and estimate when you’ll turn a profit
Whenever you start a business or expand an existing one, you should have raised enough capital to meet your goals. If you don’t have sufficient money at the start, you’ll be more at risk of having to scale back operations or even close the business.
The capital needs of each business are unique, based on factors such as necessary equipment, location, and inventory costs. But how can you determine how much money you’ll need to shepherd you through the early period where you’ll be working to build revenues and reach profitability?
Identifying startup and recurring costs
Certain costs will be one-time expenses that you’ll only occur when you start a business or make an investment to expand it. These could include buying equipment, acquiring the necessary licenses or permits, or hiring a professional consultant to help you get started.
Other costs will be ongoing once you’ve established your business. These include rent, utilities, insurance, replenishing inventory, and employee payroll.
You can identify most of these costs simply by contacting vendors and suppliers to determine their costs. Others can be more variable; for example, you may estimate the cost of leasing an office based on market rates but ultimately end up paying more or less depending on the space you end up choosing.
Combining these costs will give you an idea of the lump sum you’ll need as an initial investment as well as the recurring costs you’ll face as you start to buildyour business. The U.S. Small Business Administration has a useful calculator to come up with the estimated sum you’ll need.
The general recommendation is to have enough money at the outset to cover the startup expenses along with at least six months of monthly expenses. This ensures that you’ll be able to meet your operational costs while building up your customer base and revenues. You may want to save up slightly more than this amount to give yourself some extra reassurance in case of unexpected setbacks.
Why this calculation is important
Calculating your startup and monthly costs should be part of your overall business plan. This will help you set the goals you hope to reach, develop financial forecasts, estimate cash flow and revenues, and determine a break-even point when you’ll start to become profitable.
A firm estimate of the cash you’ll need to start a business will be particularly useful when seeking funding. Lenders and investors are unlikely to approve open-ended requests for funding, so having a set amount will improve your chances of success.
Logging your startup costs will also be helpful come tax time, as these expenses can often be deducted.
Saving money on startup costs
Entrepreneurs may be dismayed to see how high their startup estimate is, but there are certain strategies for reigning in the cost. You may simply need to scale back what you hope to do at the outset, which will winnow down your expenses considerably while still giving you the option to expand later on.
If an office space is not essential at the start, you can start out with a home-based office to cut out a major startup and monthly expense. Social media marketing allows you to start generating buzz about your business with little or no expense.
Don’t cut too many corners, though. You’ll need to determine where it makes the most sense to invest money rather than try to cut costs. For example, new equipment will be more expensive but also offers better reliability and functionality than purchasing an outdated old machinery.
Be adaptable once your business is off the ground, as it’s unlikely that things will go according to plan. You may need to take steps to strengthen your cash flow, such as bartering your services instead of paying cash or firming up your receivables by requiring a 50 percent down payment or shortening the timeline on your invoices.