Small Business Expenses - Calculate your Startup Cost


By Steve Strauss

Q: Steve - I read your column last week about the 5 steps for starting a new business and I was wondering if you could elaborate a bit on the money aspect of this. Specifically, how do I know how much money I will actually need to open the doors to my business? This is a fairly confusing issue. -- Jeff, Port Townsend, Wash.

A: One of the best parts of my new gig here at the Small Business Center is the variety of questions I am getting from readers. Covering everything from the mundane to the highly technical (FYI: I am a small-business geek, not a computer geek!), the questions reveal a deep interest in how technology can be, and is, used to help make business more fun and productive. So keep the questions coming. By letting me know what interests you, you can, to quote Jerry Maguire, "help me help you!"

One consistent theme I have seen in the questions so far is an interest in business start-up issues. As I said in my last column, starting a new business should be one of life's great experiences because becoming an entrepreneur enables you to fulfill your dreams in a very concrete way. Yet even so, we have all also heard those daunting statistics about the failure rate for new businesses: I just saw a report from the Bureau of Labor Statistics indicating that in the late 1990s, about 33% of all new businesses failed within the first two years.

Why is that?

One of the main reasons is that entrepreneurs who started these businesses did not correctly calculate what it would really cost to open their doors and keep them open long enough to start turning a profit. Without actually knowing how much money you need to get going, you run the risk of starting out with a cash-crunch. While a more established business can handle an occasional money crisis, not having enough money is usually the death knell of a start-up.

So today I want to explore what it takes to realistically, and easily, calculate your start-up costs. Here's how:

1. Do your research. The best way to figure out what it is going to cost to start your business is to find out what it cost people who have already started similar businesses. There are several ways to get this information:

  • Interviews: My favorite method is to find actual entrepreneurs who have already traveled down the path you are embarking upon and speak with them. Now, it may be that business owners in your city will be reluctant to help you as they will rightfully view you as potential competition. But entrepreneurs in neighboring towns will not. Call some up, take them to lunch and soak up their knowledge.
  • Trade associations: Every industry has a trade association connected with it and they are a wealth of information. Find one associated with your area and contact them. Many of these associations have start-up kits, and you should ask for one.
  • Trade shows: Trade shows bring people who already do what you want to do together in one place. Imagine the collective wisdom you could tap if you attend the show.
  • Libraries and Web sites: Librarians are still out there, and their job is to help you find out what you need to know. Similarly, there are no shortages of Web sites (like this one) that can also help you learn what you need to know.

The idea is to get a clear picture about what you will need to spend money on initially, and for the first six months of operations. This, in turn, will tell you the minimum amount of money you need to raise. Once you know what it is really going to cost to start and run your business (as opposed to what you think or hope it will cost) you can begin to make some realistic plans that can help ensure your success.

2. Figure out your initial expenses. You will encounter several costs when starting your business that you either will not encounter again or will not encounter for a while. The research above will help you put dollar amounts to the following items:

  • Incorporating
  • Legal and accounting
  • Licenses and permits
  • Remodeling
  • Rent, security deposit or real estate purchase
  • Signage and marketing materials
  • Initial inventory
  • Supplies, furniture and equipment

Total: $

A word of caution: Be conservative with your numbers. There is no point in doing all of this research and calculating these expenses if you end up creating pie-in-the-sky numbers. Doing so serves neither you nor your investors.

3. Figure out your ongoing expenses. Next, you need to figure out what your ongoing, monthly expenses will be. Among the expenses you should expect to pay (and there will likely be more, depending upon your business):

  • Rent or mortgage
  • Utilities
  • Payroll and owner's draw
  • Inventory replenishment
  • Insurance
  • Advertising and marketing
  • Taxes
  • Debt repayment
  • Working capital

Total: $

4. Crunch those numbers. Now comes the scary part. You multiply this last total by six. This tells you how much money you must have to run the business for six months (and six months is the minimum cash reserve you should have. Many entrepreneurs say a year is more appropriate.)

Here's an example:

Jillian's Juice Bar Initial expenses: $21,000 Ongoing monthly expenses: $6,000

Multiplying the ongoing monthly expenses by six equals $36,000. Add the initial expenses of $21,000 to that and we see that Jillian needs $57,000 to start her business.

See, that wasn't so hard.

 
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