How much will it take to start that new business you’re thinking of? Use these simple steps to develop a good estimate. You don’t get to know for sure, but if you have the discipline to break things into meaningful pieces, and then research each of the pieces, you’ll have a good idea.
Starting costs for any new business are a matter of two simple lists. The first is expenses.
Some common startup expenses are always associated with starting up. For example, legal expenses related to setting up the company, or expenses for fixing up a location, designing a logo, signage and so forth.
Other expenses are normal running expenses, like rent and payroll, which take place before launch. Lots of startups need to rent the location and pay some employees before they launch. While these are the same as running expenses later, they belong on the startup expenses because of timing.
All these expenses create a formal accounting loss at startup. In the example here, the loss at startup is $16,000. That loss won’t matter to taxes until there’s a profit, and at that point it can be deducted against taxable income.
The value of the list is that you can estimate items one by one. What will the attorney cost? How much do you need to send on computers? Each of these estimates is the result of calling and asking and finding out.
Your next list is what you need to buy to own, such as starting inventory to stock the store, or office furniture, vehicles, land or equipment. These are assets, not expenses. You won’t be able to deduct them from income later, but you will be able to depreciate them as an expense at some point.
As with those starting expenses in the first list, make this one a list of educated guesses. Call people and ask and get good estimates of what things will cost.
The starting cash you need in the bank is also one of those assets, but leave that one for the next step.
People will say you need six months or even 12 months worth of expenses before you start, but those who say that probably never had to raise money for a startup. Unless you have your own funds to use, having some arbitrary cash stockpile is not realistic. What you want to estimate is how much cash you need, not how much you want.
For that, make two lists. Both have months on top, one after the other, as columns. The first has your sales forecast, month by month. The second has your spending budget, month by month, for the same months. Make as many months as you can reasonably expect it to take before your startup sales cover its spending. The vast majority of startups have a period of deficit spending before they start to break even with sales and expenses.
After you’ve made those lists, calculate the total cumulative deficit you have to manage before the business breaks even. Round that number up to the nearest thousand, or ten thousand, and that’s what you need to put into your starting assets as starting cash.
So that, in a nutshell, is your estimated starting costs. It’s not a definitive list, of course. And it’s not certain. But at the very least, you should have a fairly good idea of how much money that business you want will require to get going. And a good idea is better than a wild guess.
(Image: courtesy of leanplan.com)
Founder and Chairman of Palo Alto Software and bplans.com, on twitter as Timberry, blogging at timberry.bplans.com (link is external). His collected posts are at blog.timberry.com. Stanford MBA. Married 44 years, father of 5. Author of business plan software Business Plan Pro and www.liveplan.com (link is external) and books including The Plan As You Go Business Plan, published by Entrepreneur Press, 2008.