You can have the best business idea of the century, but your cash register probably won’t be doling out angel’s wings (to quote It’s a Wonderful Life) the day you open. Every new business should allow time to work out the kinks, learn from mistakes, and build a following.
Time equals money. So how much money do you need to start your business? The majority of U.S. entrepreneurs start their businesses on a shoestring. According to Census data, more than 40 percent of all small businesses started up for under $5,000. Sixty-four percent of entrepreneurs in a recent Intuit survey started with less than $10,000. Obviously, the more cash you have to fund your startup, the easier your life will be during the often hectic first months. Your first task is to research what it will cost to start your business in your geographic region, in your industry, or in your marketing niche. Here are some tips on calculating the amount of cash you will need to get your business off to a great start.
A reputable supplier can be a worthy ally to a startup, offering experience gathered from years of working with businesses similar to yours. Be prepared to make multiple calls and to ask a lot of questions. A vendor who is willing to take the time to help you understand your equipment needs may be just the person who deserves your business and your loyalty. If you are among the majority of entrepreneurs watching every penny, consider whether gently used machinery, fixtures, furniture, or other equipment will serve your needs as well as gleaming new ones. Resellers who deal in used equipment for offices, restaurants, and other businesses may be able to put together a deal for you that will take a chunk off your startup costs.
If your sales skyrocket, you can deal with the happy problem of financing the supplies you need to fill a deluge of orders. However, it is often more helpful at the outset to make a pragmatic plan for the worst-case scenario. You need to know up front how you will weather a month — or two or three — with no sales. How much will it take to keep the doors open while you build your brand recognition? Document it all, including whether you will have employees and what kind of space you will need, down to the cost of ink and paper for your office printer.
A great way to research operating expenses is by talking to other business owners. You will probably be surprised by how much information people are willing to share. Everyone likes to be asked to share their experience and wisdom. If you can’t find a local mentor, SCORE may be able to connect you with a counselor in your field.
Small-business owners wear many hats: bookkeeper and sales rep, marketing manager and designer, CEO and janitor. How soon will you need or want to outsource some of these services? Professional help is an expense that has to be weighed against the boost it may give to your business. If you have funding to bring in a pro to help with marketing, for example, you may hasten the day when your enterprise turns a profit.
Even if enough money comes in to sustain your business, you may choose to forgo paying yourself during the startup phase. A clear working knowledge of your personal finances is vital at this stage of the business. What are your monthly expenses? Are you prepared for large annual or semiannual expenses, such as school tuition, property taxes, or insurance premiums? Will you continue to work a side job or put all your efforts into your business? A rule of thumb for wage earners is to have three months of personal living expenses in savings. For self-employed people, the common wisdom is to keep six months of living expenses in reserve. This is particularly crucial when starting a new business — and you may want to set aside as much as a year’s worth of cushion to give yourself a comfortable margin for your learning curve.
Persistence Pays Off
It’s not uncommon for entrepreneurs to try more than one business idea before they achieve success. If you research your idea and create a solid financial plan, it will be that much easier to start over if your first stab at entrepreneurship doesn’t make it. Success simply means picking yourself up once more than the number of times you fall down.