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. This guide explains how to calculate the costs to start up.
When you start up a new business, 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.
If you’re starting a new business, do you have enough money in savings or access to loans and grants to cover any shortfall?
It’s often a good idea to determine how much money you’ll need to start your business, long before you intend to launch.
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, vehicles and other tools or equipment you need to get your business started
- Initial inventory to sell or raw materials to create the goods that you plan on selling
- Deposits, legal fees, and licenses, all of which must be paid for your business to remain compliant with regulations
- Computers, software and phones that may be essential to communicating with clients and completing your work
- All the other items needed to get your business off the ground (such as domain name, web site, business card costs, etc)
If you’re unsure how to get accurate costs, contact key suppliers directly or conduct an online search to see how much suppliers charge. Specialist or custom costs such as 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 experts, or rely on your own industry knowledge.
Use a start-up cost template to tally up everything you need.
Step 2. Calculate money in reserve
Unless you’re in a position where 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 lead generation
- 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. For example, it can be low if you’re self-employed and working from home or high if you have many employees and are paying rent.
If you’re confident of immediate sales because you have contracts in place or have confirmed advanced work, 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 costs 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.
Step 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, leasing, renting or borrowing what you need instead of buying tools and equipment brand new, as you can always upgrade later when you have more cash.
- Working with contractors or freelancers instead of hiring full-time employees from the start. This enables you to keep costs down while maintaining flexibility in your work force. Once you have more money and more consistent needs, you can look at hiring full-time.
- Working from home instead of renting an expensive office. This is especially useful if you don’t have to meet clients on a regular basis or can meet them in a less formal location, such as a coffee shop.
- Negotiating terms with suppliers to obtain payment terms that meet your budget. Even a small reduction in your costs can help you in the long term.
Anything you can do to reduce your set-up costs will lower the amount you may have to find. Once you’re earning money regularly you can look at spending your money in ways that benefit your business and make it more efficient to run.
As you prepare your final figures, remember to consider any changes in costs (especially if there is a 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 advisor to review your figures and double-check you haven’t missed anything.
It’s important that you have an accurate picture of how much money you have and how much you’ll need to start up your business. Explore what you’ll have to pay for upfront costs, what your monthly bills will be, and how much you have available to determine whether you’ll need additional sources of financing to get going. For more business tips and tools, check out Diamond’s Interactive Business Resources page.