In any new business venture, meticulous financial planning is key. It can determine whether your business survives long enough to thrive. Accurately estimating your capital costs is a big part of that: If you overlook significant expenses, you run the risk of running out of money before the business can establish its footing, when it’s most vulnerable to failure. It’s tough for a fledgling small business to survive that.
When you’re starting a business, it can be easy to forget that it’s not just about getting off the ground. It’s also about staying there. Ideally, at the time you start operating, you want to have enough money to not only open your doors but also cover your costs for at least six months — and preferably more.
Know what you really need.
There are many costs to consider. You’ve got the basics of running the business: salaries, materials, operating/manufacturing space and insurance, the costs of which depend on your line of work. But some startup expenses are less obvious, and they can have a big impact.
Here are a few you may not have considered in your initial capital-needs calculations, including:
• Operational learning curves
• Costs of living during the break-even period
• Repeating costs (taxes, insurance, permits/licenses)
• Marketing needs
Marketing is a need, not a want.
It’s easy to leave marketing costs out of the initial budget. In the grand scheme of initial expenses, if you’re trying to start lean, it can seem like an extra. But for most businesses, it’s not.
Unless you’re starting out with all the customers you need, you should get word of your existence out there immediately. That might mean business-to-business marketing or business-to-consumer marketing. Either way, there are a lot of options in format and approach, including but not limited to:
• Paid ads (TV, internet, print, radio, signs)
• Loyalty programs
• Social media presence
• Email blasts
• Support/sponsorship of a visible organization (philanthropic group, sports team, public radio)
• Direct mail
How much marketing money you need depends on the specifics of your business, product and marketing plan — and especially on whether you do it yourself or pay a marketing professional. The DIY approach costs less, as it eliminates an additional paid position; on the other hand, effective marketing is a learned skill, and it may take a while for you to get up to speed. Your time costs money — money that might be better applied to an area of your personal expertise.
As in many things, it comes down to a choice between cost and expertise. Remember to take the trade-off into account when factoring marketing into your startup costs.
Some startup costs aren’t just for startup.
Some of your initial costs are one-time investments in the company, but many are not. Licensing, permits and certifications are often-underplayed recurring costs, but they count toward the bottom line, sometimes significantly.
Most businesses need to obtain some combination of permits, licenses and/or registrations to meet county, city, state and/or federal regulations. Depending on your industry, that may include regulations related to sales, zoning, business operations, safety, taxes, industry licensing and professional memberships and certification. Fees can range from a few hundred dollars to more than $10,000 each — and obtaining them is just the first step.
To remain in operation, you also have to maintain them, which might mean monthly, quarterly or yearly fees. Make sure to build those expenses into your initial assessment of your financial needs.
You’ll need to eat during the break-even period.
Businesses generally don’t turn a profit as soon as they open their doors. That could mean running in the red for a couple of months or a couple of years, depending on the industry — a home-based marketing business is probably looking at a shorter time-to-profit than one manufacturing a product — but however long it takes, you still have to pay your rent or mortgage.
You can draw a salary during this time, but it’s a risk. Ideally, the money stays in the business until the business is secure. That means your initial costs include your living expenses for a certain period of time, for you and any dependents. You’re probably looking at housing, utilities, health insurance, food and household supplies, any necessary travel and a whole slew of other costs, especially if you have kids.
How long it takes to break even depends on your startup costs and your sales. In all of these calculations, keep in mind that your business’s efficiency in Month 2 will not match its efficiency Year 2. Whatever your product or service, you can assume your initial output will be lower than ideal as you learn the ropes and refine your systems and strategies. Build that into the break-even equation. Overestimating your startup needs can’t possibly hurt your business’s chances of surviving long enough to thrive.