Have you been dreaming of starting up your own business? Have you come up with a plan to become your own boss? Is it time to turn your startup dream into reality?
If you’re ready to take the plunge and get your business up and running, you need to start thinking about the practicalities. First things first, you need to know the cost of starting a business.
90% of new startups fail according to Forbes.com.
One of the main reasons for this is that important things are ignored; too much time is spent on one (exciting) aspect of the business, while another ‘boring’ aspect is neglected. While you may not find the finance details of starting your business super exciting, it’s a vital part of ensuring your success. (Wo)man cannot start a successful new business on creativity alone.
As a would-be entrepreneur, there are a lot of unknown variables when starting your own business. Whether you’re borrowing or investing a lot of your own money, there are risks — particularly if you haven’t done your homework.
Do your research and be prepared for the financial side of things — budget accurately, and you give yourself as much of a headstart as possible.
The basics of financing your first business
So how much money does it take to start a business? The amount of money you need to get your business off the ground 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, and will help you 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. This can vary enormously depending on your concept, business plan, and a whole host of other factors.
Some businesses are founded with a very small budget — Richard Branson started his empire with just £300, and now covers everything from music to retail to transport, with a net worth of approximately $5 billion.
Some are started on substantially more — fashion mogul Philip Green started with a £20,000 loan and went on to become head of many British high street chains including Topshop, Burton and Miss Selfridge.
To start understanding how much you need to start a business, you need to calculate your minimum cost. Don’t try to google minimum costs and set your benchmark according to someone else’s business plan. You need to tailor your financial plans to your own individual needs – first, begin by finding the minimum cost of your startup.
You need to have at least that amount.
Overhead expenses & how to calculate them
To find the minimum cost of your business, you have to determine your overhead expenses.
Overhead includes operating costs that do not directly produce sales; examples of overhead include rent, utilities, taxes, and insurance. These are basic things that you need it to run your business.
Unlike selling inventory, overhead does not create an immediate channel to cash. For example, an ecommerce player will need to pay a web-hosting company, but they don’t exchange their website for money.
The good news is that overhead expenses are often fixed, so they’re easy to predict.
Fixed costs repeat periodically and are the same amount each time. So let’s say you pay monthly on an annual $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.
Benchmarking startup costs
Of course, the type of business you’re planning to open affects startup costs.
For example, operating online tends to be a lot less expensive than at a physical location. With ecommerce, you avoid rent, utilities, and other overheads 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, not only must you look at how much cash you need, you also have to calculate when it will filter through your company. To estimate future sales and expenses, you need to project cash flow.
What is 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.
As a new startup owner, your problem is that projections are usually based on past accounting records, and you don’t have any yet. 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. Make sure that you also 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 new business venture, you need to be prepared: expect to spend, but not earn any money at the beginning. If you’re doing things right, 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, rather than just paying off overheards.
Calculating the break-even point can show you several key pieces of information — firstly, 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.
There are plenty of break-even point formulas on the internet to help you figure out yours, and analyse it.
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. Make sure you’re prepared when you are starting your business.
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, and can catch you unawares when you’re already well into starting up your business. According to a study by online business service Geniac, new business founders tend to underestimate their costs by around £2000 ($2500).
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 — areas that you have no expertise in, but are a necessity when starting up your own business.
For example, hiring an attorney is an important step to gaining a trademark, and you’ll also need help with important legal documents. It’s usually a good idea to employ an official accountant too; keeping your finances in-house can get messy unless you’re extremely good with numbers.
Some specialized consultants may be able to offer ecommerce advice, which is worth looking into. Just be sure to consider professional costs as you gauge the cost of starting a business, as this can catch you out.
How much money do you need to start an ecommerce business?
Thinking about starting an ecommerce business? Online business startup costs do vary in comparison to a regular startup. One of the wonders of the world wide web is that it’s opened up a whole realm of opportunity for savvy entrepreneurs.
The cost of starting your own business can be reduced dramatically if your business is based online, as money can be saved on overheads such as rent.
As with any new business venture, when it comes to ecommerce business, preparation is key to getting your venture off the ground.
Starting your own ecommerce business will entail the same planning and research to get going as any other normal normal startup would. Make sure that you’re prepared, and don’t get caught out just because you’re starting an online business.
Each of the steps we’ve listed above can be approached in ways geared toward ecommerce success.
Here is a quick recap of the strategies mentioned earlier, and how you can apply them to building an ecommerce business.
Find the minimum cost: To start your ecommerce company, you need to have at least the minimum cost before you begin operating.Ecommerce businesses generally have smaller startup costs because there is little overhead. You can run your business from home, meaning you won’t have to spend any additional money on overheads like rent and utility bills.
But you’re still going to need to have an online shop to sell your products on — website platforms like Shopify can help you to build and customize your online store. They also help with things like shipping and payments, but they will cost money too (although substantially less than rent on a physical shop would).
Project cash flow: As with any business, if your startup is going to succeed, you need to project cash flow to ensure that everything will run smoothly and to plan. Use online resources, recently published data, and market analyses to project cash flow. Look at similar ecommerce 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 online 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 ecommerce business legal and healthy.
Financial calculators and resources for first-time entrepreneurs
The good news is that there are plenty of online tools you can use to help you with managing your startup costs.
Have a look at the links below to get started:
- CalcXML – this handy online calculator allows you to input your predicted finances. startup costs are divided into two main categories: one-time startup costs and recurring monthly expenses.
- Entrepreneur – Entrepreneur also host a starting costs estimate startup costs, taking into account expenses and assets.
- Bplans – Bplans do a great set of online guides to help you understand things like cash flow. Have a browse to get an idea of realistic start up costs and download their balance sheet template.
- Xero – We’d recommend using money management software like Xero to control your business finances online. They help you deal with all sorts of things, like payroll, invoicing and purchase orders.
- Shoeboxed – this is a handy platform for keeping on top of all of your receipts: you can scan, organize and archive receipts, create expense reports, track mileage, and prep for tax season.
- Indinero – Full-service, online accounting software. They have a visual graph-heavy dashboard to help you clearly understand your finances.
- Mint – Mint is a organizing app where you can keep track of your bills and paying them – they’ll send reminders of when bills are due, and you can pay bills at the click of a button.
As you can see, there is no set answer to the question, ‘how much do I need to start a small business?’. There is never going to be a magic figure that can be plucked out of thin air.
Instead, you will need to calculate this yourself by taking all of the above into consideration. It’s worth putting time into, to ensure that your dream of successfully starting up your own business doesn’t crash and burn.