While estimating startup costs can be treated as a fairly reliable ‘science’, it is as complicated and diverse as quantum physics. In other words, there are countless factors at play, including the contemporary global economic landscape, the business landscape in your city, and the branch of industry you want to thrive in.
The cost of your startup will depend on what you want to produce and the business model you choose to adopt. Thankfully, you do not have to throw a small fortune on a financial advisor in order to get the ballpark figure. In order to accurately estimate the costs of starting a business, you can simply turn to the greatest resource of our age – the internet.
The 101 of startup costs
Startups, especially in the realm of e-commerce, have become common applicants for credit loans on the proverbial map of worldwide banking, and most respected institutions will offer a range of specially prepared credit packages for eager entrepreneurs. This is an astounding fact when you consider that only ten to twenty years ago the smallest startups were universally financed out of pocket. So, what does this mean for you?
Let us first clearly define the nature of your startup costs. This should be treated as an umbrella term for unavoidable expenses and asset purchases that are essential for your company to lift off the ground. We can treat these two categories as the bedrock of what will keep your business ‘propped up’ for the foreseeable period which is typically mired in crushing obstacles.
A division into expenses and assets
The category of expenses is reserved for rent, payroll, travel, certain marketing material, and limited range of office supplies. This last item falls under the category of assets as soon as the required article becomes expensive and big enough to be considered a cornerstone of the business – the material that is intrinsic to its nature and success. This is, for example, an engraving machine – or two – if you want to create an engraver’s business or a vehicle for transportation business, etc.
Thorough research combined with conservative projections
While you can sit down and create a spreadsheet where you will start listing all the items in these two categories, this is not the fastest or the most efficient way to discover the initial cost of starting a business. Remember – the power of the internet is on your side.
There are useful websites with accompanying services that will grant you a chance to quickly calculate what you would owe and weigh your options according to the approximation. Just don’t forget to account for residual expenses of the time period once the company gets off the ground. Even with good performance, it will take some time before you begin accruing capital.
Apart from that, always aim for a conservative assessment. The residual expenses mentioned above should be a part of this pessimistic projection and it will help you secure what is called a financial cushion that covers up to one year of business expenses. However, you should also be careful about overkilling it with the loan application. Otherwise, you might end up burying yourself even further in debt if things do not go completely according to plan. Interest rates are a dark cloud that looms over your business and the last thing you should do is ignore it.
A division into fixed and variable expenses
In addition, there is another way to assess the cost of starting a new business fairly accurately – by divvying up the expenses into two completely different categories that can be tagged as fixed and variable. Let us say, for the sake of argument, that a rent and utility bills are fixed expenses in a stable economy; add to this insurance and administrative costs, and you have yourself the ‘mosaic’ of fixed expenses. Keep in mind that this goes without even considering the unpredictable factors. You can treat this as the unshakable financial foundation of your company, the number you can truly get behind.
Now, variable expenses are matters such as payroll (since the number of employees is going to fluctuate dramatically in the first few years, let alone first 12 months), packaging and shipping, as well as inventory. This other type of expenses is where you should concentrate all of your wise entrepreneurial pessimism.
Refer to industry peers
While it is advisable to discuss your possibilities with the experienced entrepreneurs in the same field, referring to industry peers can also denote checking out the companies that have already trodden the ground you are about to walk. You can (and should) look up financial statements of all publicly listed companies that belong to your field of interest and possibly look beyond that. By noticing the interaction between these companies and their competition, both corporate and for the clientele, you will be able to predict ‘where the wind blows’ before you jump into the fray.
Every good entrepreneur respects the volatile web of businesses that fluctuates like a restless ocean in a tempest. This is an economically unstable environment, which is why ‘too big to fail’ is such a golden goal for many business owners.
That being said, nobody feels this volatile nature of businesses better than entrepreneurs that have just launched their company. The collision of expectations and expenses can be a soul-crushing grind that keeps you stuck between a rock and a hard place, which is why you need to adopt the ever-so desired resilience and flexibility. Plan changes as the financial winds turn, and that is the name of the game if you want to succeed.