How Much Do You Need to Start Your Business?
No business ever starts with the problem of having too much money. Barring a lottery ticket win that spurs endless cash into a venture, most entrepreneurs take the leap into business ownership with a shoestring budget and gut determination. If you’ve ever sat down with a business advisor one of the first questions asked will be, “How much money do you have to start?” It’s a reasonable question that leaves many budding business owners scratching their heads and feeling defeated before they’ve even begun. Exactly how much is enough?
In 2009, The Kaufmann Foundation estimated that a new business start-up required on average $30,000. While that may have been for a brick and mortar Main Street business, many micro-businesses can start with significantly less, somewhere in the $3,000 range. Home-based franchises can start with even less financial commitment anywhere from $500 to $2,500. But this all still feels like speculation and as anyone with a checkbook knows, it’s important to know where the money is going and how much to plan for the coming weeks and months.
Let’s start at the beginning. You’re sitting at your kitchen table ready to take your business idea to business reality. What’s first?
1. Begin tracking expenses as soon as possible. Associated costs with starting the business can be deducted up to $5,000 in the first year before your business even makes its first sale. Costs above and beyond the first $5,000 will need to be amortized over a period of 180 months starting with the first month your business opens.
a. Market research – Often involving more time than money, market research can include even your mileage costs to the library or the related costs for purchasing key industry reports. Costs for these can range from just your time to several thousand dollars depending on the depth and qualify of your research.
b. Secure your business name by registering with your country clerk or state government. If you are using a Doing Business As, or DBA for your sole proprietorship, Partnership or Limited Liability Corporation (LLC), you’ll need to register this name. Check with your individual state and county for specific rules, but costs can range from free to $1000 depending on your state and business type.
c. Travel – Keep track of any travel to view potential business locations as these can be deducted.
d. Consultants – Lawyers, accountants and business advisor fees can all be counted as start-up expenses. Plan on spending anywhere from $75 to $250 per hour for consulting fees. You’ll want to budget more if the business is complicated or will require ongoing consulting support or patent work.
2. Start-up Calculators can give you a good ballpark number. You can use a quick start-up planning calculator by going to Entrepenur.com or at the Wall Street Journal. If you determine that your expenses are too high, take another pass at the numbers and see what can be trimmed. Instead of purchasing expensive software licenses, try some of the cloud-based programs. If buying hardware is too costly, investigate leasing agreements instead. Once you have a good starting point, you’ll want to take those estimates and formalize them into a full-blown business plan. While business plans may seem like drudgery, they are a necessity for a successful start-up.
3. Talk with other business owners and gain the value of their experience. Reach out to other business owners both in your industry and in a range of other business types. You’ll glean a realistic picture of costs, ways to reduce them, and learn some of the potential pitfalls of business ownership.
4. Develop a plan to cover your operating costs for the first month and a large list of potential customers. Knowing who your customers are and how to speak to them will help you immediately put sales vehicles into motion. Buying customers mean cash can flow into the business as soon as the doors open.
No list can be exhaustive on all of the line items you’ll want to cover before opening your business. The start-up calculators and a full business plan will be the best road map to gauge financial readiness.
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