The amount of money you need to start your business will depend largely on your industry and the services or products you provide. However, there are some good rules of thumb to determine what those costs will be.
Remember, you will be starting your business before you have income coming in to support it, so you will have to determine what you really need and can afford based on that factor. To determine the cost of starting your business and therefore how much you need to borrow, you will need to use a business loan calculator.
Before you get to that stage though, you need to figure out the numbers you will put in that calculator. Here are some basic guidelines to use.
Define What You Need to Spend Money On
There are a few different categories for the things you need to spend money on. They look deceptively simple at first:
- Production: This is how you will produce or obtain the products or services you are going to sell. This includes all the equipment you will need for manufacturing or to perform the service you will be providing.
- Distribution: This is the means by which you will get your products and services from you to your customers. Whether this is shipping or an internet connection, you must pay for your distribution method.
- Marketing and Advertising: How will people know about your new business? You have to tell them, and that is marketing and advertising (yes, they are different, but both cost money).
- Administration: Somehow you will have to coordinate all of these different activities, and the way you do that is through administration. This includes software, hardware, and maybe even some training or education.
- Personnel: You will need people to run your business. You can only be a solopreneur for so long before you run out of hours in the day.
What is included in each of these categories will be largely dependent on your type of business and what you do for your customers. However, every single business will have something under each of these categories. In order for your business to be successful, you must be able to pay for these things until your income surpasses your expenses.
This can take some time, so plan the type and term of any financing you take out accordingly.
Split the List
Now that you have your list, you need to separate it into two different categories: what you absolutely need to do and what you want to do. This is a tough one. How do you determine the category for each item?
The things you need are the things you simply cannot start or run your business without. For instance, you probably need a computer, an office of some sort, and some basic office supplies. You might want a new computer, or a new phone dedicated only to your business, but that may not happen right away.
There are also things like business cards and marketing materials that while they may seem superfluous at first are essential to marketing and your growth as a company. These should go on the needs list rather than the want list. The want list can include some more elaborate marketing, but you need to at least cover the basics for a while with your initial funding.
Once you have created the list and narrowed it down, you need to assign a cost to each item. This means you must look at real, hard costs not estimates. If your internet service will be approximately $70 a month, contact local providers and get exact quotes on what you need.
Not only will this help you decide on a provider, but it will help you get the right amount of financing because you will have hard numbers to work with. Then based on the funding you can raise or borrow, you can decide which items on the want list you can do without for now, or if ideally you can afford both your wants and needs.
The final piece of estimating the cost of starting your business is timing. You will need to have funding long before you start making money, and enough to sustain your business until you are. This means you must also project how soon you will start making money and be fairly accurate and conservative in that estimate.
This piece also determines when you will need the funding you are seeking. You will need some equipment ahead of time while other items can wait until you are open or have been operating for a while. The timing of your funding is critical, as is the timeline in which you are expected to pay it back.
Estimating the cost of starting a business is a daunting task at times, however having an accurate picture of your needs makes it easier to find the right funding at the right amount and with the right terms. Doing this accurately will make it much more likely that you will be successful.
Are you ready to take the next step in becoming an entrepreneur? How do you plan on funding your business? Leave us a comment in the section below.