The one sure thing you need when you start a business is money, and probably much more than you first thought. Even if you “made a list and checked it twice,” it’s a good bet you overlooked something.
In fact, many business analysts cite lack of cash flow as the leading cause of first-year business failures. And the best way to not join that list is to know what you need at the outset.
How do you determine how much money you need, not only to get your business started, but to keep it running until more cash is flowing in than out? One way is to consider all of the costs involved in running a business, not just those that are obvious.
There are several types of costs to be considered.
Start-up Costs
Depending on the business, this could include anything from power tools to paper towels. Some of these will become recurring costs, as well, once your business is operating. For example:
- Professional fees – attorneys, accountants, advisors and other professionals who will be invaluable during startup, and perhaps thereafter.
- Government Fees – city, state and federal licenses, permits and registrations, for example – some of which might require renewals.
- Equipment & materials.
- Office or workspace furniture, supplies, etc.
- Marketing and advertising – Yellow Page listings and ads, website design and hosting, newspaper ads, printing (letterhead stationery and envelopes, business cards, invoices, order sheets, brochures, flyers/pamphlets, etc.).
Fixed Costs
This includes those bills that arrive on a regular basis and cannot be avoided or postponed, such as payments for:
- Rents or leases for property and/or equipment.
- Utilities –¬ electricity, telephone and fax lines, internet access, etc.
- Insurance – to protect yourself, your employees and your business against theft and other problems, as well as damage to persons or property related to your business.
- Salaries, payroll deductions and benefits, including that for owners and partners.
Unless you have an outside source of income, or unlimited savings, you’ll still have personal obligations, such as housing and food, car payments, utilities, insurance, etc. Estimate how much salary you’ll need to be paid to cover your living expenses.
Variable Costs
Some costs fluctuate with the ebbs and flows of the business. For example, more business could mean increased upfront costs for:
- Labor and materials.
- Inventory.
- Shipping, packaging & postage.
- Sales commissions.
- Travel/commuting expenses, especially if your business involves customer-service or delivery.
Cash Reserve
What happens if your business doesn’t start off as profitable as you thought it would? If it is interrupted because something breaks down and you don’t have the know-how or a service contract to repair it? If the roof falls in?You should consider a cash reserve, or “rainy day fund,” to handle emergencies, such as equipment breakdowns, lost sales or contracts, etc.
Many emergencies could be covered by insurance, but you’ll still have to continue until the insurance check arrives. Such situations might also be addressed through short-term loans, such as a “bridge Loan” or a “microloan.”
Cost Calculators
No one can think of every cost contingency, of course. Every business – and every person running a business – has different needs. But the more you factor in at the outset, the better prepared you’ll be down the road.Handy tools for doing this are “cost calculators” that can help you estimate business costs, financing costs and many other aspects of operating a business. Their worksheets usually cover at least the basic items, and perhaps some you didn’t think of. These can often be found online at the websites of banks and other lenders that offer business loans.
The Small Business Administration (SBA.org), as part of its Small Business Planner offers links to two commercially available on-line calculators that can be used to tabulate and estimate business startup costs: