How to determine your start up costs
It’s often a good idea to determine how much money you’ll need to start your business, long before you intend to launch. Think of it as a reality check, as even if your business is the best idea ever, it’ll only succeed if you can find the funds to get going.
Your start-up costs could be minimal (a computer and your bedroom floor) or substantial (specialist equipment, vehicles and on-going monthly costs like rent). It doesn’t matter how big or small you intend to be, as it’s the same calculation to know what it’ll cost to set up. And if you end up needing $2,000 or $200,000, the result is the same if you don’t have it; your business remains just an idea.
To help you determine if you can afford to start, follow this three-step process:
Step 1. Calculate up-front costs
Before you open your door for business, you’ll most likely have a series of one-off costs you won’t need to pay for again for some time, such as:
- Plant, machinery and vehicles
- Furniture and premises fit-out
- Initial inventory or raw materials
- Deposits, legal fees, licenses
- Computers, software and phones
- All the other little bits and pieces (domain name, web site, business cards etc)
If you’re unsure how to get accurate costs, contact key suppliers direct or an online search should provide a good guide. Specialist or custom costs such as bespoke software or industrial machinery may be harder to find out. In these examples you’ll need to use an estimate, so ask other businesses or rely on your own industry knowledge.
2. Calculate money in reserve
Unless you’re extremely lucky that sales will cover all overheads on day one, chances are it will take some time until you’re making enough money to pay for your regular fixed monthly expenses (and therefore break-even). Typical costs include:
- Marketing and generating sales
- Utilities (power, phone, internet)
- Finance costs (business loans, overdrafts and lease payments)
- Employees, rent, sub-contractors
- Software and subscriptions
The amount of spare cash to help pay these costs is often called ‘working capital’ and varies (low if self-employed and working from home or high if lots of employees and paying rent).
If you’re confident of immediate sales (have contracts in place, confirmed advanced work, strong indication of demand) then you may only need a month or so in reserve. But if you’re unsure or the lead time to get customers is long, then you may want 3-6 months of these overheads in savings to cover these overheads.
Use a cash flow template to estimate likely monthly expenses and then decide how many months of cash you want in reserve based on your estimate of revenue.
3. Determine the cash you need
Now it’s a relatively easy exercise to add your fixed set-up costs to the monthly working capital amount to figure out how much money is required to start.
How much does it come to? Do you have enough money in savings or access to loans and grants to cover any shortfall?
If the answer is no, then don’t despair just yet. Now is the time to review all your estimates and identify a minimum viable total, where you could still start up, maybe just not as fast or with everything in place.
Think about removing anything that isn’t mission critical and bootstrap your start up by:
- Buying second-hand equipment and not new
- Borrowing what you need at least in the short-term
- Leasing or renting instead of buying
- Asking suppliers for extended terms
- Using up any favors or getting friends and family to help
- Delaying any purchases until the business can afford them
Anything you can do to reduce your set up costs will lower the amount you may have to find.
As you prepare your final figures, remember to consider any changes in costs (especially if there is a time delay between researching your costs and starting) for example a falling dollar for imported equipment, changes to supplier prices or conditions, new license or legislation compliance costs or increases in ongoing expenses.
If you need help calculating your overall start-up costs, talk to your banker, accountant or business adviser to review your figures and double-check you haven’t missed anything.