Ask an aspiring entrepreneur their biggest obstacle to launching a business and the likely answer: money.
Not only do you need adequate financing to get your business up and running; you also need to plan to cover expenses, such as payroll and production, until you start making a profit.
Startup costs can be tricky to calculate because they vary widely depending on your business, industry, location and other factors. Yet by understanding how much money you’ll need to start and maintain your business, you’ll increase your chances of success and longevity.
If you’ve already written (or started writing) a business plan, you might have already spent time on your startup finances. If not—or if you want to dig a little deeper—let’s take a look at the three P’s that will help you determine your startup costs and what’s next.
The critical first step when considering your startup costs is to get an idea of how much money you’ll need to get up and running.
According to U.S. Census data, more than 40 percent of small businesses started for under $5,000. Your business could vary, of course, depending on the specifics of your startup. And that’s why it’s so important to put pen to paper and crunch the numbers.
This isn’t the time to account for every single expense you might encounter. But consider the following four categories to help organize your startup finances.
- Capital expenses—These are assets that add to your business’s value and are typically viewed as an investment on the part of your business. Examples include office equipment including computers and other technology, machinery and office and/or production space.
- Operating expenses—These expenses are generated by the day-to-day operation of your business. Think of costs like utilities, insurance, inventory, supplies and salaries. Remember: it’s not only important to calculate the costs you’ll need to cover to start your business, but also to keep it financially solvent until you turn a profit (more on that in the next section).
- Professional services—It’s unlikely you’ll start and maintain your company without any professional services. This is where you’ll factor in costs for things like legal assistance, accounting fees, website development and hosting, and marketing/advertising/PR.
Lastly? It’s important to also consider your personal financial situation. Will you need to pay yourself right away? Or can you afford to forego salary while you build your business? Understanding your own finances is just as critical to the success of your business as your startup finances.
Some of these numbers may come easy, and some may be harder to determine. Don’t hesitate to reach out to other entrepreneurs for their input on particular expense categories.
You can also use a handy tool like the Wall Street Journal’s startup calculator to better understand what you’ll need to start your business. Once you do that, it’s time to look ahead.
We talked earlier about the importance of not only understanding what you need to start your business, but also the cost to keep your business running.
Here’s the deal: you probably won’t make a profit right away. If you do, that’s fantastic. But if you don’t, that’s OK, too. By projecting future expenses—and also understanding what profitability looks like for your business and how you’ll get there—you can better plan for your company’s financial future, which is especially important if you opt to pursue funding for a business startup.
Using the expenses you outlined in the previous section, you can project what it will cost to run your business for the next year. As you calculate your financial projections, be sure you’re considering both fixed costs like rent, utilities, salaries and professional services, as well as variable costs such as materials, supplies, labor and customer service.
Be realistic in your planning, it’s hard to know what the future holds – yet it’s important to understand how your startup’s financial future might evolve. This speaks not only to your understanding of your startup finances, but also the larger market.
You may also find it worthwhile to create two types of financial projections: one that’s conservative, and one that’s more aggressive. That way, you’ll have more of a financial baseline, but also a goal to work toward.
By totaling the expenses you defined and using your financial projections, you should now have a better understanding of what it will cost to start and run your business. Now, you can prepare to meet that financial reality.
First, review the expenses you’ve calculated. If you find yourself encountering “sticker shock,” take a harder look at your startup expense categories. Is there any way you can realistically cut back without having an adverse effect on the business?
Here’s one example: office space. Do you need dedicated office space to launch your startup, or could you launch from a home office or somewhere less expensive, like a co-working space, and then grow into something larger?
That said, you don’t necessarily want to cut corners on professional services or anything that would diminish the quality of your product or service. Keep in mind that it’s always easier to grow, rather than scale back, but you also shouldn’t feel pressured to launch with a lesser version of your vision.
Once you’re comfortable with the startup costs you’ve calculated, then you can make a plan for how you’ll meet those costs, including getting a small business loan.
There’s no doubt that funding for business startups has evolved to include a number of alternative sources to traditional funding, such as grants, crowdfunding, venture capital and angel investors. Of course, that makes deciding on the best financing option a little more tricky. This is another ideal time to reach out to other entrepreneurs and small business owners to get their advice.
Another option? Kauffman FastTrac, an immersive, online curriculum designed to help you navigate your startup’s launch, including financing. The self-paced courses give you tips, tools and resources to help you fully plan and launch your business, including:
- Setting realistic financial goals
- Determining the steps to profitability
- Identifying potential funding sources
As you work on identifying and calculating both your startup costs and your financial projections, consider also enrolling in Kauffman FastTrac. The courses are free (take that, budget!) but offer invaluable peace of mind when it comes to ensuring you’ve created a comprehensive financial plan and the best path forward to meeting your specific funding needs.
There’s no doubting that startup finances are tricky. Yet with Kauffman FastTrac, you’re supported by a partner who’s invested in your success. Talk about a dream team!