The money any entrepreneur needs to launch a startup varies by their business type. However, you'll need enough capital to fund various milestones to help you reach your goals, such as hiring staff, purchasing equipment or software, or marketing your business. Here's how to figure out how much you'll need to launch your business.
Make a Plan
To determine how much money you’ll need, you should make a detailed plan and budget. Find out who and what you need and how much time it will take to meet your goals. Then raise a little more money than you need and take action to prove the worth of your startup. Here are a few reasons why you should raise more than you need.
- Extra money gives you a cushion and allows you time to start your business the right way.
- If your startup does well, you have immediate access to more cash.
- If your startup didn’t do well, you have some time to remedy it.
"Test your idea in a small, inexpensive way to understand whether customers need your product and how much they're willing to pay for it," said Cynthia McCahon, founder and CEO, Enloop. If the test seems successful, then you can start planning your business based on what you learned.
Start Small or Lean
When determining business startup costs, it's vital to be realistic or lean. Since things like office space, legal fees, payroll, business credit cards and other organizational expenses can add up as you build a solution that can get your customers’ job done.
The cost of launching a startup has gone tremendously down because expenses like marketing and managing business and buying updated software have reduced with outsourcing options. However, it is still costly to launch a startup considering the cost of skilled employees and experienced outsourcing companies.
Estimate Your Costs
Entrepreneurs must account for various expenses when calculating the required initial investment to launch a startup. While every type of business has its own financing needs, according to the U.S. Small Business Administration, most microbusinesses cost around $3,000 to start, while most home-based franchises cost $2,000 to $5,000.
When planning your costs, remember that your expenses can rise as the business grows. Serial entrepreneur Drew Gerber – who has started a technology company, a financial planning company and PR firm Wasabi Publicity – estimates that an entrepreneur will need six months' worth of fixed costs on hand at startup.
Understand the Types of Costs You'll Have
It's crucial to understand the different types of costs you'll have as a new business. "You need to differentiate between these costs to properly manage your business' cash flow for the short and long term," said Eyal Shinar, CEO, Fundbox. Here are a few types of costs for new business owners to consider.
One-time and ongoing cost
Every startup includes different one-time expenses at the time of launches, such as expenses for incorporating a company and purchasing equipment. Ongoing costs, by contrast, are paid regularly and include expenses such as utilities. These generally do not fluctuate as much from month to month.
Essential and optional costs
Essential costs are expenses that are necessary for the company's growth and development. You should make optional purchases only if the budget allows.
Fixed and variable costs
Fixed expenses, such as rent, are consistent from month to month. However, variable costs depend on the direct sale of products or services and each business situation.
Project Your Cash Flow
Projecting your business cash flow is another important aspect of a startup's financial planning. Bill Brigham, director of the New York Small Business Development Center in Albany, advises new business owners to project their cash flows for at least the first three months of their business. Also, add up fixed costs and estimated costs of goods and best- and worst-case revenues. Calculating these costs can help you keep your business viable and determine the cash necessary to start it up.
Most Common Startup Expenses
There are different types of expenses to consider when starting your business. Here's a list of costs you'll likely have as a new business:
- Website design and hosting costs
- Rent for office space and warehouse
- Office furniture and machines like printers
- Hiring, training and retaining staff
- Electricity, water, telephone and internet bills
- Essential office supplies, such as pen, paper, and coffee
- Basic technology
- Insurance, license or permit fees
- Marketing, advertising or promotion costs
Once you've determined your costs and projected your cash flow, you should find a suitable funding source. Personal savings, loans from family and friends, bank and government loans, and grants are just a few potential funding sources. Additional funding can come through angel investors and establishing business credit and different lines of credit.