Introduction
Starting a business in most cases require money. It is important to determine how much money you will require to launch you business venture. There are several expenses that you will incur especially if you are starting to run a business from scratch. Some of these will be one-time expenses such as the cost of incorporating the business. Others will be continuing or recurring expenses like marketing materials, office rent and so forth. Calculating your small business startup costs is critical for two reasons.First,you can use this information to request for funding or to attract investors for you business.Second,it will help you to get a clear picture of how much startup money you will need to avoid cashflow problems until your business starts to turn a profit. In this post, I describe how you can determine how much money you will need to launch your business.
Understand the types of business costs
First, before you begin determining the costs of starting a business, you should understand how business costs are classified. There are for instance capital expenditures which are one-time acquisitions such as equipment, property and vehicles. Then there are fixed costs that are incurred regardless whether you sell or not. These include employee salaries and offence rentals. There are also variable costs that are determined by sales volume, as your sales grow, so do your variable costs. These include things like raw materials.
Your one-off expenses and assets
Think about the kind of assets that you would require to open your doors? Depending on the type of business you may need office furniture, a vehicle or equipment. Determine the total value of assets required.
Your ongoing or recuring monthly expenses
Determine how much it will cost to run your business in a normal month. You can add things like employee pay, office rentals, utility costs, advertising and marketing expenses. Again, calculate the sum of these monthly expenses.
Add an extra cushion for your operations
Since yours is a new business, customers may need time to learn about it, and business may be slow. Make sure you have enough finances to keep your startup viable by allowing for an extra cushion. Consider planning enough money to keep your business running for up to a year after you have launched it.You do this by multiplying the total of monthly recurring expenses by twelve. That will inform you how much money you will need to run your business for a year. Then add it to the assets total. This will tell you how much money you will need to start and run your business for a year. I recommend having at least twelve months’ working capital in the bank before you start.However,for some business types, a six months cushion will do.
Conclusion
Having adequate money in the bank before you start ensures that you will have enough time to create and grow your startup. Running out of money before the business can sustain itself is a common cause of startup failure. It is therefore critical that you understand the startup costs before committing. Your potential investors or partners will also take you seriously if you know the numbers.