Are You Financially Prepared to Start a Business? Setting a Budget

Jaimy Ford by Jaimy Ford on June 25, 2014
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The day has finally come when you feel mentally and emotionally prepared to open your own business. You have the ideas; you have the plan, and you have the ambition. However, the one thing you might be missing is enough cash to start your little enterprise.

But how much does it really cost to start your business? Unfortunately, there is no set answer because the cost depends entirely on the type of business you want to run, your industry and your geographical location. Rather than use an arbitrary number, your safest—and smartest—bet is to spend some time estimating what your business will cost to launch.

Determine your initial startup costs

To get your business off the ground, you will need to make some initial investments before you start making money. Depending on your business type, these costs could be substantial. For example, a brick-and-mortar business will probably require more upfront investment than a web-based business.

To start, it is very likely that you will be responsible for a business permit, license and/or incorporation fees, so check with your county and state to find out how much that will cost you, or use a service like Quickbooks Licenses to complete the tasks for you.

In addition, if you are opening a store, you may need to purchase a property or put a large down payment on a commercial or retail space.

Other upfront costs could also include:

  • Website development
  • Security deposits on various services, office spaces or rentals
  • Business cards and stationary printing
  • Signage for your storefront
  • Computers, software and other office equipment
  • Heavy machinery or vehicles
  • Furniture, decor and supplies for either an office or retail space.

The overall cost will depend heavily on your taste and the clientele you want to attract. For example, businesses selling a luxury brand may have to invest much more in their store furnishings, and a business specializing in technology must offer a state-of-the art web experience.

You will need to distinguish between what would be helpful and what is absolutely necessary. Do you need a more expensive retail space because it gets more foot traffic? Do you really need an office, or can you operate out of your home until you’re ready? Is the latest laptop really necessary, or can you use your old one for a while? Create a line-by-line budget of everything you expect to spend just to launch the business, and separate these costs into “needs” and “wants.” Ideally, you will have the liquid assets to cover the amount of both, but you may need to make some concessions.

Starting a new business is tough enough, and starting drastically in the hole could mean failure. The more debts you have, the longer it will be before you are profitable. Focus on making sure you have enough to purchase everything you need to start your business, then go from there.

Add up projected ongoing monthly costs

After the expense of starting the business, you will have ongoing—typically monthly—costs to cover. While you will hopefully start generating revenue right away, the following regular costs will eat away at that revenue, and it may take you months before you see a profit. You must ensure that you can cover all of these costs—and still come out on top—to be profitable:

  • Loan and business credit card payments, including interest.
  • Salaries, wages and commissions for you and employees.
  • Insurance for employees and the business.
  • Utilities such as internet, phone, gas, water, parking, trash removal and so on.
  • Rent or mortgage on the property.
  • Services for website hosting or maintenance, accounting, public relations and so on.
  • Supplies and inventory.
  • Sales and marketing campaigns.
  • Taxes.

In most cases, it is ideal to start with the bare minimum that you need to launch, so eliminate the expenses that you can afford to do without. Then, as you begin to generate money, you can add employees, contracts with more vendors and increase your advertising budget. Experts recommend that you have enough cash to cover at least six months’ worth of ongoing expenses the day you open your doors.

Don’t forget about your personal budget

Unfortunately, chances are you won’t make too much profit in your first few months of operations. As such, you’ll need to take into account your personal budget and calculate how much will be needed to survive at least the first six months of business. This is very similar to a business budget and can be completed in three steps:

1. Track expenses: This should include every and all purchases you plan on making, including large ones and small ones. An example of a list of expenses would be:

  • Home (i.e. rent or mortgage, insurance, warranty, maintenance and repairs, taxes, etc.)
  • Auto (i.e. car payments, gas, insurance, tires, maintenance, registration fees, etc.)
  • Utilities (i.e. electricity, water, gas, trash, phone, internet, cable, etc.)
  • Food (both groceries and eating out)
  • Healthcare (i.e. medical, dental, vision, etc.)
  • Personal (i.e. clothing, hygiene products, medicine, etc.)
  • Entertainment and others (i.e. gym membership, movies, games, sports events, holiday shopping, vacation, etc.)

A good way to track expenses is to use the same credit or debit card for purchases and use the statements as references, or you can set aside a certain amount of cash per week and limit your spending to that amount. You’ll also need to account for fixed and variable expenses. Variable expenses fluctuate in price and can include:

  • Food (e.g. prices of certain produce fluctuate according to seasons)
  • Transportation (as gas prices change, so do your expenses)
  • Utilities (most are based on usage and can alter your expenses)
  • Family emergencies
  • Car and home repairs

2. Categorize and describe purchases: Putting specific purchases into categories (i.e. home, auto, utilities, etc.) and describing them thoroughly will give you a visual of where your cash is going and how you can better arrange your expenses. For example, if you need some extra cash for car repairs, this list will help you decide where you can subtract from unnecessary expenses for this essential purchase. Some accounting software will help facilitate this process as well as other aspects of your budgeting. For example, Mint is a free service that allows you to organize, calculate and maintain your budget from a simple dashboard.

3. Budget by the month: If you’ve quit your job to start a business, you will likely have much less income than you’re used to for the first few months of operations. As such, you should take into account your nest egg—the savings you plan on using to keep you afloat while your business is starting up—to calculate your monthly budget. You will want to survive at least the first six months without a profit, so simply take the savings you’re willing to spend, and divide it by six. This is how much you can realistically afford to spend each month. You should compare this to your monthly expenses and adjust accordingly, omitting unnecessary expenses if your savings come up short. Doing these calculations will allow you to project how long you can stay afloat without much revenue; it can also help you decide if starting up is truly in your best interest.

Estimate potential growth

Hopefully, your business skyrockets, and fast. Just don’t forget to calculate for that kind of growth. You may need to increase inventory and manufacturing or hire more people to cover the workload. Take some time to project your best-case scenario for growth, and calculate your operating expenses based on that number. Ensure that you have the money to meet supply and demand in case the demand for your product rapidly increases.

If you feel a bit overwhelmed about how to even start calculating what you need, the Small Business Administration has partnered with SCORE, formerly the Service Corps of Retired Executives, to offer entrepreneurs training and support. SCORE consists of volunteer business leaders and owners who have successfully operated businesses similar to yours. They can offer insight on what to expect and advice for overcoming challenges.

Ready to take the next step?

If you feel like you know exactly how much dough you need to launch your business—but you just don’t have it yet—you do have options. One option is to hold off another six months and focus on setting aside greater savings. If it’s critical that you launch your business now, there are many types of business loans available for small business owners, including government and bank loans.

Or you can seek the backing of an investor or an angel or VC fund (i.e. a lending network that allows communities of investors to provide funds to business owners and gain returns on their investments) or pursue crowdfunding.

Learn more about great sources of capital for your new business here.

Jaimy Ford

Jaimy Ford is a business writer and editor. She writes subscription newsletters, training tools and blogs that focus on professional development, leadership, productivity and more. Her goal in everything she writes is to provide actionable advice that you can put to use immediately.

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