Business start up costs
Regardless of what type of business you plan on establishing, if you've already secured funding, or just trying to figure out what it will take to get started, it is necessary that you have an accurate estimate of start-up costs in order to predict financial performance in the first few quarters. Naturally, every business and every industry has different cost requirements; however, there are some basics calculations that you must make to determine how much money you need to start your business.
One of the first things you should do is develop comparables: Look at industry leaders to help predict your own business's costs. Naturally, large companies and chains will be more efficient; since they have greater buying power and economies of scale than a start-up, but you can still use their percentages as goals for your own business.
Networking is extremely important. Easy ways to do this are: Contact trade associations, small-business message boards, or entrepreneurs in related fields. Trade associations are a valuable source of information for both new and established companies. Whatever industry your start-up is in – from coffee shops to fish farming– there is probably an entrepreneur support group with industry information and statistics; there even may be a magazine to which you can subscribe. Also, don't be afraid to seek out other entrepreneurs who have set up shop in your industry and talk to them about their experience with start-up costs. Franchises are also an option and provide a rich source of information.
Don't be hesitant about asking for help. Another good source of information and assistance is the Small Business Administration. They can offer you knowledgeable assistance and can also point you in the right direction to securing loans. If you're unfamiliar with this agency, you might want to learn more about the SBA and familiarize yourself with their priceless guidance.
Look to the future
When calculating start-up costs, it is important to keep in mind that you will likely need a few months of funding to cover expenses before you even open for business. Once you do begin operating, it will take some time until the business is self-sustaining. This is necessary to ensure you'll have enough money to set up an office, take orders, hire employees, if necessary, and cover all other costs. Also be reasonable with your revenue assumptions in the early stages and be conservative with cost projections. It may also be possible to structure a small-business loan to defer payments during the initial operating period.
The following are things you should plan for when you're calculating your initial cash flow requirements:
One-Time Start-Up Costs
- Fixtures and equipment
- Decorating and remodeling
- Installation of equipment
- Starting inventory
- Deposits with public utilities
- Legal and other professional fees
- Licenses and permits
- Advertising and promotion for opening
- Salary of owner-manager (amount you need to pay yourself)
- All other salaries and wages
- Delivery expense
- Office Supplies
- Taxes, including Social Security
- Legal and other professional fees
- Estimate the number of months needed to find customers and get established
Although the following are included above, these are important things to keep in mind:
- Insurance/Bonding - Does your business have any such legal or ethical requirements? Are there industry standards you need to abide by? What risks are you undertaking that you might be professionally liable for?
- Professional Services - You may not think you need ongoing accounting, legal, or other help, but what about an initial consultation with a CPA to get your books set up properly? Or with an attorney to draft your basic contract? Or a business coach? "Sole proprietor" doesn't have to mean you do everything yourself.
- Taxes - Prepare to pay quarterly as cash starts to flow. Entrepreneurs have many deductible items, but they also have to pay all social security taxes. Remember, no one is withholding for you. A good practice is to set up a separate account for taxes and transfer money into there as it comes in.