Ready to turn your business dream into reality? First, you need to know the cost of starting a business. The amount of money you need to get started depends on a lot of different factors. Consider startup costs carefully before launching your entrepreneurial idea.
There are several steps you can take to figure out the starting cost of your business. Here are just a few ways you can decide how much money you need:
- Find the minimum cost
- Project cash flow
- Figure out the break-even point
- Understand professional fees
The following sections detail each item you should consider to see how much money you need to start a business.
Find the minimum cost
Knowing how much money is needed to start a business can be a challenge for entrepreneurs. Begin by finding the minimum cost of your startup. You need to have at least that amount.
To find the minimum cost of your business, determine your overhead expenses. Overhead includes operating costs that do not directly produce sales. Examples of overhead include rent, utilities, taxes, and insurance. You need it to run your business.
Unlike selling inventory, overhead does not create an immediate channel to cash. For example, an e-commerce player will need to pay a web hosting company, but they don’t exchange their website for money.
Overhead expenses are often fixed, so they’re easy to predict. Fixed costs repeat periodically and are the same amount each time. Let’s say you pay monthly on a $480 business liability insurance policy. You can anticipate paying a fixed amount of $40 every month.
To figure out the minimum cost of your business, add all expected operating costs. Also, determine how much inventory and materials you need to produce your expected sales. Then, add the figure to your overhead.
The kind of business you open affects startup costs. For example, operating online tends to be less expensive than at a physical location. With e-commerce, you avoid rent, utilities, and other overhead that a physical store has. Check industry averages to help you figure out how much money you need to start your business.
Project cash flow
As an aspiring entrepreneur, look at how much cash you need, and calculate when it will filter through your company. To estimate future sales and expenses, project cash flow.
Cash flow is the money that funnels into and out of your business. To find projected cash flow, start with the amount of cash you have on hand. Predict how much money your business will bring in for one month and add it to the starting amount. Then, estimate monthly expenses and subtract them from the cash. Continue the process for the following months.
In theory, projecting cash flow is simple. But, projections are usually based on past accounting records. Without a financial history, a new business owner must learn how to do market analysis. Your research should consist of competitive and market studies.
A competitive analysis looks at your competitors. Review sales patterns for businesses with a comparable industry, size, and location. Pay attention to seasonal changes, as well as spikes and dips in cash.
With a market analysis, evaluate your offerings in relation to target customers. Explore customer needs and expectations, and look at your profit margins. Market research and competitive study data show patterns of other businesses.
Keep in mind that cash flow will be slow at first when creating projections for your new business. Early in business, you’re essentially trying to give momentum to a stationary object. It takes time for money to start flowing in and out at a healthy pace.
Figure out the break-even point
When you first start your business, you spend, but you don’t earn money. The cost of starting your business will begin to reconcile as you make sales. You reach the break-even point when your sales equal expenses.
Breaking even is the neutral line between negative and positive cash. While zero dollars might not sound very impressive to you, it’s a milestone to celebrate. When you hit the break-even point, you’re about to own a profit-generating company. More of your dollars will begin to go towards your paycheck and growing the business.
Calculating the break-even point can show you several key pieces of information. You can see how many sales you need for a positive cash flow. You can also find out how much money you need to get above a zero dollar bottom line. And, the break-even point can reveal how long it will take to turn a profit.
Knowing when you will break even can keep you from overextending yourself. You get a clear idea of what your business needs to do to make a profit. Some entrepreneurs start with big, underdeveloped plans, which can make overcoming obstacles overwhelming.
Understand professional fees
Some startup costs are obvious. If you want to sell a product, you need to buy inventory and invest in inventory management. Other expenses are not as apparent. One cost of starting a business that often goes unnoticed is professional fees.
Professionals are often small business advisors who provide specialized services, such as lawyers and accountants. You will need expert consulting for some aspects of your business. For example, hiring an attorney is an important step to gaining a trademark. Some specialized consultants may be able to offer e-commerce advice, as well. Consider professional costs as you gauge the cost of starting a business.
How much money do you need to start an e-commerce business?
Thinking about starting an e-commerce business? Each step listed above can be approached in ways geared toward e-commerce success. Preparation is key to getting your venture off the ground.
Here is a quick recap of the strategies mentioned earlier and how you can apply them to building an e-commerce business.
Find the minimum cost: E-commerce businesses generally have smaller startup costs because there is little overhead. To start your e-commerce company, you need to have at least the minimum cost before you begin operating.
Project cash flow: Use online resources, recently published data, and market analyses to project cash flow. Look at similar e-commerce businesses for an accurate estimate of future incoming and outgoing funds.
Figure out the break-even point: Put your minimum cost and cash flow projections together to find your business idea’s break-even point. Use this information to set prices and see how long it will take to earn a profit.
Understand professional fees: Don’t forget about hidden costs of running a business, like professional fees. Just because your business lives online doesn’t mean you will not pay for services that help you operate. Accountants, attorneys, and consultants keep your business legal and healthy.
Amanda Cameron is a content writer for Patriot Software, LLC. At Patriot, she explains difficult accounting and payroll topics for small business owners.