You may have the best product or service in mind, but turning your idea into reality takes money. Unless you’ve saved for years, chances are you don’t have the money it takes to start your business. An Intuit survey found that more than 60% of businesses start with less than $10,000. Of course, the more money you have, the easier it will be to get your company off the ground.
There’s no one answer when it comes to knowing how much money it will take to fund your business. There are all sorts of factors that must be considered including your industry, geographic region, and your business type.
Keep reading to learn about the expenses you’ll need to consider when determining how much money you need to fund your startup.
Be Optimistic But Realistic
As an entrepreneur, you likely have extremely high hopes and expectations for your business. While there is nothing wrong in being optimistic, getting in over your head in financial troubles can end your business before it ever begins. Start off on the right foot by keeping an open mind and preparing for issues before they came to the forefront.
While you may have the best idea for a product or service, you can’t assume that things will go as planned. Before taking the leap, try testing your idea in a small inexpensive setting. Set up shop at a local mall or at a farmer’s market. See who is interested in your product or service as well as how much customers are willing to pay for it.
Estimate Business Costs
Every business has its own financing needs. But, there are some tips you can follow to get a good idea of how much capital you’ll require to get your startup off the ground. On average, business owners should have at least six months’ worth of business costs during the startup phase. This ensures that your first month’s expenses are covered with money to fall back on.
As your business grows, expenses grow too. While you’re thinking about the big picture of your company, knowing the precise details of your business funding needs is crucial. Remember, most businesses fail because of a lack of funding. Save and prepare ahead of time to give your business the financial cushion it needs.
When starting your business, there are a variety of expenses to consider. Here are some of the most common:
Essential costs are those expenses that are a must in order for your company to flourish. These include marketing costs, real estate purchases, and more. During the startup phase, optional costs should be minimized as much as possible. Only make optional costs if they will benefit your business and if your budget allows. Optional costs become much more affordable once your company has stable income from month to month.
During the startup phase, there will be plenty of one-time expenses. You’ll pay a fee to license and incorporate your company as well as a fee for future loan applications. You can also expect one-time expenses like equipment purchases. Those times when you need to make one-time expenses, expect your money going out to exceed your money coming in. This means you’ll need to have extra funds to fall back on or make up the money the next month.
On the other hand, ongoing costs are regular costs such as utilities and Internet services. These costs are generally about the same each month.
Rent is one of the top fixed expenses for startups. These costs are fixed and stay the same on a monthly basis. Variable expenses are those that change depending on your sales. In the beginning fixed costs can take up a lot of your revenue. As your business grows and solidifies its income, these costs become negligible.
Project Cash Flow
Another crucial aspect of planning your startup’s financial success is to project your cash flow. You should have projections for at least the first three months of business. These projections should include estimated costs of goods, fixed costs, and revenue possibilities.
Cash flow projections should also include loans, credit cards, lines of credit and the interest you will pay on them. Consider using an SBA loan calculator to help determine these costs. Knowing these costs provides a holistic picture of the cash your business needs to get started.
To better project your cash flow now and in the future, use software like FreshBooks or QuickBooks. These tools link directly to your business bank account and can be used to track expenses each month and during tax season.
Knowing how you will pursue financing is important in the earlier years of your business. If you don’t know which methods are best for you, consider seeking advice from SCORE, a reputable small business advising institution. Knowing how you will finance your business is a must.
Do you plan to use bank loans or your personal savings? Loans from family members or friends? Federal, state, or local grants? Leave us a comment in the section below.