If you are seriously planning to go into business, there must be one question foremost in your mind: How much money will I need to get my business going?
Whether you plan to finance your business from your own personal funds or intend to obtain loans from banks and other lenders, you need a good estimate of your start-up costs. You cannot plunge in and stop midstream just because you have run out of funds because you miscalculated.
Estimating start-up capital requirements can be tricky, especially that of working capital requirements, i.e., the amount of money one will need until such time revenue streams are enough to pay for all operating costs. You have to be careful because sales projections are mere estimates. If projected sales do not materialize, then working capital estimate will be erroneous. One will need more money to sustain business operations.
First of all you have to know the various categories of start-up costs. Pre-operating expenses, fixed capital investments and working capital expenses can be classified in either of the following categories:
- Cost of production: Trial production runs, product inventory, raw materials, manufacturing equipment, shipping, packaging, shipping insurance, warehousing
- Permits and licenses: Business registration, trademarks, copyrights, patents, drafting partnership agreements, legal fees for ongoing consultation, retaining an accountant.
- Technology costs: Computer hardware and software, printers, IT consulting
- Administrative costs: Various types of business insurance, building improvements, training expenses, installation of utilities, office supplies, licenses and permits, express shipping and postage, product packaging, parking, rent, utilities, phones, copier, fax machine, desks, chairs, filing cabinets – anything else you need to have on a daily basis to operate a business
- Sales and marketing costs: Inauguration costs, commissions, initial promotional activities and materials, printing of stationery, marketing materials, advertising, promotions, event or trade show attendance or sponsorship, trade association or chamber of commerce membership fees, travel and entertainment for client meetings, mailing or lead lists
- Wages and benefits: Employee salaries, payroll taxes, benefits, workers compensation
Once you figure out how much you need in the above cost categories, you need to factor in the time to get your business off the ground. In other words, how many months would it take before your business starts earning income?
Let’s say you’re about to open a boutique. How many months would it take from the time you sign the lease on your store until you finally open your doors to your first customers?
If answer “two months,” find out how much you will need for salaries, utilities, transportation, communications, rent, etc. during those couple of months. Factor this into your cost estimates.
It would also be useful to talk with people in the same trade or industry. Better still, visit your industry’s trade association. Talk to the pros – those who have experienced the whole gamut of the business start-up and operation. Learn from their experience.
Resist the temptation to be conservative in your estimates. It is important to be realistic or you suffer the consequences. Take into account inflationary trends. Consider there can be hidden costs or expenses you may have failed to reckon. It will be wise to add a “miscellaneous” line item equivalent to 10 per cent of your total costs.
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