We have been working our way through a list of 14 questions an entrepreneur should ask before starting a business. Today, we are tackling how much money you will need to start your business.
If you read last week's article, you know that you will need to create a business plan for your start-up and the creation of this plan will answer this week's question: how much money do I need? Most business plans produce a monthly Profit & Loss for year one and two and an annual P&L for year three. These pro-forma statements, as they are called, are basically budgets for starting your business. The more effort you put into researching what things will cost, the more accurate the budget or pro-forma P&L will be.
How do you get the information you need? Go through the process you would take to actually purchases the things you will need for your business:
1. Price out rent if you need a physical space.
2. Call insurance agents to see what types of insurance you will need and what it will cost (and what the timing will be: all upfront or is there a payment plan?).
3. Put together a list of all furnishings, fixtures and equipment you will need and shop around to see what this will cost.
4. Figure out what you need for telephones/communication devices and price that out/
5. Determine what kind of website you will need and find the right developer for that process.
6. Contact your state to determine what kind of licenses or permits you may need and what the cost will be.
7. If you will have employees, contact an appropriate service provider to help you determine what the cost will be to process payroll and handle payroll taxes. Do not attempt to handle payroll on your own if you have never been an employer before.
8. "Shop" for office supplies so you know ahead of time what all the paper, toner, pens, envelopes, business cards, notepads, etc. will cost. This adds up much faster than most people realize!
9. Meet with an advertising expert if you will need assistance with advertising and marketing help to develop the budget for this portion of the business.
If you are manufacturing a product, you will need to go through another process to determine the costs to produce your items so you can price them appropriately. You will also need to put together a sales forecast so you can determine how fast the money will be coming in from sales compared to how fast it will be going out for the items listed above!
Remember to take into consideration any terms you may have to offer customers. If you aren't going to collect payment at the time of sale or service, you will need more working capital for cash flow.
A final caveat: it always takes longer to get to breakeven than entrepreneurs anticipate so make sure you do a worse case scenario when creating your business plan so you have enough working capital to get to that key point in your start-up.
How much money do you need to start a business? It varies widely-service based businesses need much less than product based. Taking the time to create a detailed and accurate business plan will answer this question and give you a better chance at success.