How Much Money Do I Need?; A Guide to Estimate Your Startup Expenses

One obstacle that entrepreneurs face is figuring out how much money they need to start and run their business. These cost estimates are the foundations used for setting prices and rates, analyzing profitability, asking for loans and investments, and most other finance-related tasks for starting your business. This process is extremely important, but does not need to be turned into rocket science. This guide will step you through the process.

There are two major steps when trying to estimate how much money you will need when starting your business: initial one-time costs and monthly on-going costs.

1. Estimate Your Initial Startup Costs

Estimating your initial startup costs will take some time, but it will be worth the effort. When estimating your startup costs, you are ultimately making your first budget for your business. This budget is different from your future budgets because this one will have little to no income.

To determine your startup costs, you must identify all the expenses that your business will initially incur. Examples of one-time startup costs typically include:

• Incorporation Fees
• Permit and/or License Fees
• Down-payment on office space or rent for a commercial lease
• Office furniture and supplies
• Initial inventory
• Signage
• Business cards and stationary
• IT/computer equipment

These costs will be accrued before you have income to supplement your business. You should look at different facilities and options for the materials that you need to purchase, and get quotes and prices so that your estimates are as accurate as possible. Saving money during the initial phase will help you get in the habit of trying to cut expenses.

2. Estimate Your On-going Costs

Not only will you need to figure out initial one-time costs, but you should also estimate what your regular/typical monthly costs will be. Examples of on-going costs typically include:

• Your salary
• Employee salaries, wages, and commissions
• Rent
• Professional services, such as an accountant and a lawyer
• Taxes
• Utilities, Internet, phone, etc.
• Inventory
• Insurance
• Supplies
• Advertising
• Website hosting and maintenance
• Loan Payments; many small business owners forget to account for the loan payments when they are in the initial planning phase. However depending on how much of a loan you need for your initial costs this can be significant.

The on-going costs should be one of the driving forces when you calculate your prices and rates. These costs need to be covered by your potential income/sales for you to make a profit in the future. However, it is important to remember that your business will not be at full capacity when it starts - the first few months may require additional funds to support your business as your sales increase and you build your brand.

Some costs such as marketing, advertising, and salaries may need to be revisited each month as sales increase. There is no cookie-cutter way of doing this, so research various salary and marketing formulas until you find a good fit for your specific business needs. If you have the means, you can also out a small business accountant who can help you assess your planned business finances.

What Do I Do with My Estimates?

Once you are comfortable with your estimates, keep them handy. These estimates should lay the foundation of most of your financial planning. After you have come up with your estimates, you will need to look at how you are going to finance the start of your business.

• How much of these costs can you handle by yourself or supplemented by other income? Will you need a loan for the difference?
• Do you have investors willing to invest and how much equality are you willing to part with for an investment?
• Is your business going to be profitable? When do you estimate yo-ll hit your break-even point?

It is important to come up with variations of the estimates. You should have a few different budget options from bare-bones to your dream list. These are important because when you go to the bank and talk about the specifics in regards to interest rates and terms, you may decide some startup options can wait until you starting bring in sales.

What if I Need Help?

Trying to predict all your expenses for the first few months can be difficult, especially if you do not have firsthand experience. In addition to good government resources online, there is help in your area that can assist you.

• SCORE and SBDC Counselors. These counselors are there to help small business succeed in the United States. Both organizations provide free or low-cost assistance throughout the US.
• Find a mentor. A mentor does not have to be someone specifically in the field of business that you are hoping to start. You can find someone in your local Chamber of Commerce that can help you find quality low-cost suppliers. Or you can speak with the business owner next door about challenges he or she experienced when starting. Having another people look over your ideas will only make them better.
• Find someone in your line of business. If you are opening a bakery finding another bakery to talk to can provide you with endless advice. However, bakeries that see you as a competitor might not be as helpful. Look outside your market area in another city or town. Those bakers might offer much more advice.

Figuring out how much money you need should be done with care. It does-t take special forecasting software or complex equations, just a simple spreadsheet. Remember to be realistic and honest about what will get your business moving and bringing in money.

Related Resources

• Ultimate Guide to Financing. A guide to many business articles on Business.gov
• SBA.gov | Finance Start-Up. All businesses require some form of financing. An integral component of starting a successful business is raising sufficient capital.
• SBA.gov | Start-Up Costs. Calculators and information on how to accurately estimate your initial and on-going costs.

Are you starting a business and need more help figuring out the start up costs? Ask them in our Community.