Finally, the moment you’ve been waiting for has arrived. The most burning question that will influence whether or not your business is successful: how much does it cost to start a company? There are a host of significant factors that contribute to this figure – there’s no “one size fits all” answer here either.
This conversation may be one of the more important when discussing a new startup venture; because without proper funding and financial management, any hope at success could vanish in an instant. However, like with anything else related to running a startup- from revenue streams down through the marketing strategy- every detail counts!
To realistically project a business startup investment amount, there are a few things you can do. We can’t tell you what your exact number is, but we can tell you how to calculate a realistic figure for yourself.
Brenda has been winging it so far, and she’s already baking her buns off. But to really understand how to take her bakery service from the hobby level to something bigger with an actual profit margin, Brenda needs some help planning out what expenses come along with that kind of growth. If only there were some sort of checklist that would remind Brenda as she puts powdered sugar fingers on the calculator!
Here’s the list that Brenda wished she had as a guide for her business cost evaluations. This list is rather broad, but will give you a good place to start:
- Pre-Opening & Startup Costs (Research, Planning & Incorporation)
- Borrowing Costs (Lending & Financing)
- Initial Technology & Software Expenses
- Supplies & Materials
- Logistics Costs
- Employee Expenses
- Marketing & Advertising
With Awareness Branding & Consulting, our startup costs included initial staff, incorporation, design, office space, software, and marketing. We spent about $15,000 on these things in the first year to help get us off the ground. For a manufacturing company that some of our founders had been involved with before starting up our branding and consulting firm, it cost about $175k-250k to get started depending upon how you looked at it.
Start Small, and with What You Know
Don’t fall down the neverending rabbit hole of “what if” as you start tallying your potential business costs. Instead, focus on what you know first. You can then start adding in projections later. Right now, you probably know the acute needs your business has in its infancy stages.
Ryan knows that as a general contractor, he’s going to need more than just a hammer to get things done. He starts condensing his known costs first, including all the tools of the trade he needs to perform the work. He will also need reliable transportation to get to each job site. Insurance will set him back, as will licensing and permissions for local work. Those are immediate costs he can account for now. And once he feels he’s captured those hard expenses, he can start adding in future costs, including additional employees, additional trucks, a furnished office, website, marketing and funds for software that will help to build and scale his business easier.
You have monster plans for your small business, but you need to be realistic and brutally honest with your numbers. Investing too much, too quickly won’t necessarily generate results. And it’s almost guaranteed that you’ll face a series of challenges or setbacks that you didn’t see coming.
The CEO of Enloop, Cynthia McCahon, said in an interview with Business News Daily that business owners should begin their new business journey with a healthy skepticism. And as you carve out your potential costs, leave room for lessons learned along the way and be prepared with a reserve of funds to get you out of hot water, should you find yourself swimming in it.
It’s also helpful to understand the various types of expenses:
One-Time & Ongoing Costs: You’ll likely pay for those one-time expenses right now during the startup phase, like incorporation or specific equipment. Ongoing costs might be utilities, hosting services, or software services typically paid monthly, quarterly, or annually, depending on the service. A great place to find amazing lifetime deals on software is https://appsumo.com/. We have about 17 lifetime deals on software that have changed our business completely and saved us thousands of dollars per year.
Options & Essential Costs: Like the terms imply, essential costs are for those things your business can’t live without, while optional expenses represent those things that might be “nice to have” should the budget allow. Ryan might decide he should consider a new truck, but for now, he can continue driving the truck he has until the reserves are built up to afford another vehicle purchase.
Fixed & Variable Costs: Prepare your estimates according to fixed costs, like rent or an annual contract for web hosting. You can then sort the variable costs, like credit card processing rates, or project expenses, etc., with routinely changing price points.
How to Estimate Costs When You’re Starting
When you start estimating expenses, these are figures that represent what you think you’ll need to invest for success. Equipment and materials are fixed costs you know you can count on for sure. But some of the other estimated costs may change on you. Rent might go up, and employees might come at a higher price. Market fluctuations, in general, can have an effect on how much you spend on necessary business travel or even raw materials. And whether you’re looking to launch your own Shopify store or open a CNC machining shop, it’s best to prepare for your estimates to shift over time.
According to data collected with the SBA, most microbusinesses estimate startup costs at around $3,000. Those businesses within the home-based segments tend to range between $2,000 and $5,000. For larger startups, buying a franchised brand could be anywhere from $10k to $100,000, or investing in a manufacturing plant can get into the millions. But the most important concept is that you understand that it takes money to make money, and the right investments are vital to the success of your business.
The Importance of Understanding Cash Flow Expectations
One of the most relevant considerations when starting a new business is your cash flow needs. You should have an idea about how much money you will need at the beginning and end of the month for your business to stay afloat. Failure to do so can result in disaster if an emergency occurs, such as a large purchase being needed that was not predicted. Poor cash flow will cause a disruption in your bank accounts and can severely affect the growth of your business.
Starting a business is not for the faint of heart. You need to be willing to take risks, but you also want to minimize them as much as possible so that your initial investment does not become too large and unmanageable. The best way to do this is by starting off small in order to get used to the process before taking on more money with higher stakes involved.
Most industry professionals suggest having at least one to three month’s worth of expenses in reserves to start. This will allow you a little flexibility if you need to tap into those funds for an emergency without completely losing ground on operational solvency. This is why it’s always advised to save while working at your previous job if you are unable to secure or access funds from other sources.
Exploring Financing Options
One thing that you should think long and hard about before starting a new business is how to finance it. You’ll need to decide if you’d rather put your own money up in the beginning, borrow or lease equipment, space, and/or find outside investors who are willing to invest in exchange for equity. There are pros and cons worth considering with every type; borrowing may cost more, but at least you don’t have to give up equity. Whereas, if you give up equity (con), you’ll usually gain access to larger amounts of financing, which helps to scale the business faster. (pro)
In fact, access to additional capital is still a major roadblock for small business owners. And Fora Financial reported data from the Small Business Dream Gap Report suggests that 26% of business owners gave up on expansion plans because they tried and failed to acquire additional funding. Not getting the needed capital can take the wind out of your sails, but it shouldn’t stop you from advancing your mission. Get creative with the financing options and stay smart about your finances when you begin. In further blog posts, we will explain strategies to increase your chances of securing financing.
The Bottom Line
Starting a business costs money. Driving a successful business will cost more. And over time, you’ll ideally find the balance of infusing your business for growth and reaping the rewards of success. For now, your costs will be smaller and more manageable. Just be prepared for those worst-case scenarios and avoid overly risky situations that could financially wipe you out before you have a chance to shine. Stay true to your why and be precise about each financial decision you make.
For more help sorting your new business startup costs and to talk about getting off on the right foot with a marketing plan, contact us! Schedule a FREE consultation and allow us to help you visualize your next steps toward a successful business.