Calculating start-up costs – how much money do you need?
Before you start a business, you need to know exactly how much money you’ll need, and where it’s coming from. You’re out of business fast if you fall short before you’ve started.
Why you need to plan ahead
If you want to see your new business start-up succeed, you can reduce some of the financial pressure by planning ahead. Spend some time estimating your start-up costs before you launch your new business enterprise. It could help to prevent cost blowouts later.
Estimating your start-up costs falls into two basic categories:
- Set-up costs.
- Working capital.
Determining your set-up costs
This is what it’s going to cost you to get your business up and running. Set-up costs are one-off expenses that are required for your business’s launch.
It’s common for some business owners to underestimate the actual amount of money needed to start up a new business venture. Take the time to work out exactly what equipment your business will need to start generating income.
Every business has different start-up costs to consider. Yours will depend on whether:
- You’re starting up a brand-new business.
- Buying an established business.
- Purchasing a franchise.
If you’re buying an established business or a franchise, that’s the first amount you need to enter into the calculator.
Starting a new business
Tally up all the purchases you’ll have to make to get your business up and running. Some of these costs will include:
- Plant equipment and machinery.
- Office equipment – like computers, scanners, printers and photocopiers.
- Fitting out your business premises.
- Fees for licenses or permits.
Put together a reasonable estimation of the costs involved in starting up your business. It’s much easier to determine how much could be paid for from savings, and how much could be borrowed on a small business loan, if you have a clear estimate to work from.
Working out your working capital
Once you’ve determined all your set-up costs, work out how much working capital you’ll need. In other words, how much is it going to cost to keep your business running until you think you’ll break even before starting to show a profit?
Examples of these ongoing costs are:
- Rent – if you’re working out of commercial premises, factor in the rent.
- Power – whether you’re working from home or a business location, estimate the cost of power.
- Additional overheads – consider all your monthly expenses, such as Internet, phone, rates and wages.
It’s a great idea to work on a four-month basis when it comes to your working capital in the start-up phase – meaning you estimate it’ll take four months before you generate enough sales to break even.
If you’re unsure how long it’ll take to break even, start with a base of four months and see how your sales go.
You’ll also have to consider your initial purchases of supplies, whether they’re raw materials for manufacturing your products or simply stock.
Total up your costs
You can tally your set-up costs and working capital expenses using a spreadsheet. Sit down with your accountant and go through all your estimates, as they’ll make sure they’re accurate and you haven’t missed anything out.
Once you’ve added up your costs and have a solid figure in front of you, it’s time to run a break-even analysis.
This is how long you think it’ll take your business to break even based on your start-up costs. It’s an important step, because if your business isn’t going to break even within a certain time frame, then it’s going to take even longer to show a profit and might not be worth getting into at all.
If your figures show you don’t have enough money to start, don’t give up straight away. If you can’t raise the extra money you’ll need, you can try:
- Reducing overheads – look for cheaper premises or see if you can get a better deal on your energy costs. Reduce your salary and the number of staff you’d planned to hire.
- Reduce set-up costs – look for cheaper machinery and equipment or investigate leasing it instead of buying.
You need to be sure that the costs of setting up your business are feasible, and that you’ll see a return on your investment. It’s important to be as honest and accurate as possible when calculating your start-up costs.