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How to Determine Start-Up Costs
by Margot Carmichael Lester, Staples® Contributing Writer
Have you ever been so excited about doing something that you totally forgot a super-critical task? Like the time you were all wound up about an amazing pool party, only to realize you left your swimsuit at home? The same thing happens to a lot of prospective small business owners. Were so energized about our new ventures and so focused on the laundry list of things to do, we forget to plan effectively for the start-up costs associated with actually launching the business. And overlooking this mission-critical task can sink an enterprise before it even leaves the dock.
To avoid this epic fail, follow the advice below for accurately budgeting when starting your own business.
Research Start-Up Costs
Unless you're mining asteroids or drilling for oil at the bottom of the ocean, you're likely starting a business that, while unique in many ways undoubtedly, is similar at least in some part to something else out there, says Rob Belcher, vice president of Seattle-based Lighter Capital, which provides revenue-based loans for online businesses. Research, planning and setting expectations is what the very earliest stages of starting up are all about.
Takeaway: Research the start-up costs of similar businesses by:
Check Your Optimism
Enthusiasm and a never-say-die mentality are vital traits for successful business owners, but you can have too much of a good thing. Despite the optimism, you cant use the best-case scenarios when calculating your start-up costs, says John Hickman, regional director of the Eastern Region Maryland Small Business & Technology Development Center and a management professor at the Perdue School of Business at Salisbury University in Salisbury, MD.
Takeaway: Use more conservative projections. Theres a range of costs youre going to have and on at least half of them, estimate the higher end, Hickman says. On the other half, take the middle ground.
Manage the Timeline
One of the trickiest things about determining start-up costs is the timing of when these costs will be incurred, and, on the flip side, when revenues will start trickling in, Belcher says. Balancing the cash outflows and inflows, especially in the very early days of a company, is the biggest challenge.
Takeaway: Leave yourself outs ways to cut costs without having to completely fold, Belcher says. Structure these costs so that you can cut away at some of them if things grow more slowly than expected.
Budgeting out start-up costs is certainly something that most people can accomplish, depending on their experience and competence with Excel and finances, Belcher admits. But if you're taking on a significantly large project or don't have finance, management or modeling experience, then research your network for temporary CFOs, start-up coaches, incubators, accelerators and lawyers. Many of these people and organizations offer their services to start-ups for free or in exchange for a small ownership percentage of your venture.
Takeaway: Get a second set of eyes to look over your projected start-up costs. A financial planner, banker or accountant with direct experience in enterprise development is the most helpful. The other person will have a different perspective or experience and can challenge your assumptions, Hickman says. Its most important to get input here. If you make a mistake at this point, you may not be able to recover.
What Should You Include in Your Start-Up Budget?
Here are the basic elements that factor into a new ventures start-up costs. Your list will vary depending on the type of business you have (inventory or service, for instance) and the regulatory environment in which you operate.
Start-up expenditures are one-time costs, like:
Start-up expenses include purchases related to starting up and operating day-to-day business estimated for the length of time it takes you to actually launch the enterprise:
It takes a lot of resources to start any type of new company. Following this advice will help you accurately forecast your start-up costs so you can make your business a reality.
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