Starting a business can be daunting enough before even considering finances. It’s a big commitment of both your personal time and money – so you need to be sure you’re equipped to succeed from day one.
How much money do you need to start a business?
Surprisingly, financial planning is frequently overlooked and underestimated – in fact, it’s often placed behind products, pricing and branding.
Businesses that take the time to estimate their costs are able to hit the ground running, with no surprises. Doing so gives them a quicker path to break even and long-term profitability.
Estimate your expected costs
Knowing how much your business is likely to cost is key for any start up – regardless of whether you’re still weighing up the pros and cons of being in business or you’re well into the planning phase.
Knowing how much money you require will help you determine how much you need to borrow, and being sure of your finances will make it a lot easier for your business to secure investment capital when pitching to investors.
The first step towards estimating your start up costs is determining your capital costs. These include any one-off costs that are essential to opening your business. Common capital costs include:
- Purchase of buildings or land.
- Permits, licenses, or other compliance costs.
- Vehicles and machinery.
- Shop fittings, furniture, and decorating costs.
- Signage and branding.
- A website, domain name, and server space (for an Internet-based business).
Your fixed costs are expenses that you need to pay regardless of the amount of sales you make, products you produce, or how busy you are. They tend to be time-related, such as monthly charges, and are often referred to as overhead costs.
Fixed costs include:
- Wages and salaries.
- Power and utilities – like Internet, telephone, and electricity.
- Loan repayments.
Your variable costs – like the name implies – are costs that vary based on your business output. These costs may be based on seasonality (such as produce), or dependent on volume purchased (like retail stock).
Common variable costs include:
- Raw ingredients.
- Production materials.
- Stock orders.
It’s generally a good idea to be conservative, by overstating rather than understating with your estimates. At the end of your estimates, consider adding 20% for costs you haven’t thought of in addition to cost over-runs.
You might be surprised at how quickly unforeseen costs add up.
Prepare a cash flow forecast
Based on your anticipated costs (capital, fixed and variable), the next step is to cash flow forecast for the first twelve months of being in business. It might sound a little technical, but a cash flow forecast is simply a document that projects your business’s incomings and outgoings.
Payments and expenditures
Your cash flow forecast should list all the payments and expenditures you expect for the given period, the cash surplus or deficit left over after income and outgoings are accounted for – plus your business’s account balance at the beginning and the end of the period.
This could be tricky to predict, but the easiest way is to estimate demand for your product or service based on any market research completed to-date. You can put in costs according to quotes you’ve received from potential suppliers.
Cash flow forecasts are typically presented as a spreadsheet document, but an increasing amount of business owners use small business accounting software to further automate the calculations subtotalling all their categories of income and outgoings.
Remember, a cash flow forecast is only as valuable as the information and detail put into it. For this reason, it’s a wise idea to consult your acc