So you are thinking of starting a business, but have you really figured out your start up costs? How much money will you need to give yourself a fair shot? Here is how and why identifying your startup costs are so important.
Why should you figure out your out your start up costs?
Undercapitalization is certainly a big word, but it also is a reason many businesses fail. Having a great idea and validating it with prospective customers should certainly be your first step. But, once you have that figured out…. what next? If you haven’t planned out your expenses, you may fail even though your research says there is a demand for your products or services. With that in mind, let’s talk about some things you can do to plan for the long haul.
In my experience, I have found that entrepreneurs greatly underestimate the amount of money they need to not only launch a business but ensure it has an opportunity to survive and grow. The first 18 months can be pretty challenging for a business owner but if you can ensure you have enough capital, then you can focus your energy on growing your business and retaining the customers you acquire.
Early on with my clients, I ask them to make two lists:
•One list is for the expenses you need on day one.
•Another list for the expenses you are going to pay for each month.
For some, this is where things get scary. Imagine the surprise of thinking you need $20k to get started when you probably need something closer to $80k.
If you are opening a coffee shop, for instance, you will need the equipment, furniture, supplies, marketing and many other things. That is great for an opening day, but please don’t expect customers to be lined up out the door on day one. I am not saying that isn’t possible, but you should be planning for a much slower and realistic growth.
While the $20k may have covered your first month’s rent, equipment, supplies, etc…..how are you going to pay yourself, your employees, next months rent, utilities, more supplies, when your customer growth is gradual? Realistically, it may take you 6 to 12 months to reach a break even point. That extra $60K in this example would be used to cover those costs as your business gets established. We call this your runway. When thinking of an airplane that needs to take off, the longer your runway, the greater chance your airplane has to get off the ground. Your runway is actually something a bank or investor will be interested in seeing.
So, if you are needing to finance your business, include this in your projections and if you don’t want to do this alone, contact us and we can help.
Bryan Shaw, MBA – Founder of Scaleable Ventures, Inc, business accelerator director, co-founder of a couple of startups, realtor…. pretty much a serial entrepreneur. Like it or not, all views are my own. @BGoGolf