The Methods and 4 Step Process to Ensure Funding for Your New Business Venture
Preparation, preparation, preparation; even before you open a business, there are bills to pay. Pre-opening costs and expenses must be handled just to get you up and running. Preparing for and understanding these expenses will help you launch successfully.
The Methods of Startup Cost Calculation
The Traditional Method of Startup Cost Preparation
Traditionally as a startup, you draft a business plan to estimate business startup costs. Your plan should include your revenue, profit, and expenses estimates for the next three to five years in the financial projections section.
This handy worksheet from the SBA can help you do this and is found here: SBA’s startup costs worksheet.
While preferred for funding, creating a business plan can be a long process and isn’t suited for all business types.
The Quick Method
If your business requires a quick launch method or isn’t suited for creating a business plan, you can simply calculate startup costs. While this method doesn’t give you the full benefits of a business plan, it can help you:
- Estimate profits
- Conduct a break-even analysis
- Secure loans
- Attract investors
- Save money with tax deductions
Whichever method you choose to calculate your startup costs, you will want to ensure that you include all costs associated with your business.
The Startup Cost Calculation Process
1. Define Your Startup Costs
Businesses typically fall into three categories: brick-and-mortar businesses, online businesses, and service providers. Each of the three business categories has slightly different startup costs associated with them based on their needs and business models.
Below is a list of the typical startup costs you can expect for most businesses. Once you know which category of business yours falls into, you will want to add any other expenses unique to your business:
- Office space
- Market research
- Creating a website
- Equipment and supplies
- Licenses and permits
- Lawyer and accountant
- Employee salaries
- Advertising and marketing
- Printed marketing materials
2. Estimate Your Expenses
Use your list of expenses to now estimate how much they’ll cost. This process will be different for each expense as some will have well-defined costs like permits and licenses, where some prices will have to be estimated, like insurance or salaries. Looking online, getting quotes from vendors, and talking directly to mentors and service providers to see what similar companies pay for expenses is a way to do this.
3. Add Up Your Expenses
Now you should organize your expenses into one-time costs and ordinary monthly expenditures. This will give you a complete financial picture of the costs and expenses you expect to incur.
One-time expenses will be the initial costs needed to start the business. For example: buying or renting a space, hiring a marketing company for web/graphic design, paying for permits, licenses, fees, etc.
Typically, you can deduct one-time expenses for tax purposes, saving you money on the amount you’ll owe. Always keep track of your expenses and talk to your accountant when it’s time to file your taxes.
Monthly expenses typically include rent, salaries, and utility bills. You’ll want to calculate at least one year of monthly costs, but three years is ideal.
Adding up your one-time and monthly expenses provides you with a good picture of how much capital you will need.
4. Get Funding
Once you have all the data, the best thing to do is create a report or spreadsheet of your expected costs.
Make sure whatever format you choose is clear and easy to understand because investors and lenders use this to help determine the potential for your business to profit.
Also, keep in mind that your startup could experience delays and setbacks. Having enough funds to support your startup running with extra capital in the bank could mean budgeting enough to sustain your business for up to 12 months beyond the target launch date.
Final Thought! Don’t Splurge Be Realistic: Cheaper Isn’t Always Better
The costs of starting a business add up, with a lot of them being non-negotiable. Make sure to research before you spend funds on high-ticket purchases, and keep in mind there can be ways to take care of some of these costs on the cheap.
Some examples can be:
- Leveraging social media can cut down on marketing costs.
- Using software like QuickBooks instead of hiring a professional bookkeeper.
- Working from home or utilizing a co-working space as an alternative to leasing office space.
Knowing what things to spend your money on is a better way to do things than, say, buying poor-quality equipment just because it’s cheaper. It could cause you to lose time and money performing repairs, and you could still need to purchase new, and no one wants to waste money you could use elsewhere.