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Estimating Start-up Costs

Starting a new business is exciting but it's also a huge commitment. The process can take up plenty of your time and money before your business even begins to generate profits.

Reduce some of the financial pressure by planning ahead. Spend some time estimating your startup costs before you launch your new business enterprise. It could help to prevent cash flow issues later.

Estimate your start-up costs

It's common for some business owners to underestimate the actual amount of money needed to startup a new business venture. Take the time to work out exactly what equipment or services your business will need to start generating income.

Every business will have different startup costs to consider, depending on whether you're:

Make it your business' mission to become involved in the local community by:

  • You're starting up a brand new business
  • Buying an established business
  • Buying a franchise

When estimating your start-up costs, you should take into account some of the following categories:

Capital costs

Your capital costs may include items such as:

  • Vehicles
  • Equipment and machinery
  • Office equipment like computers, scanners, printers and photocopiers
  • Fitting out your business premises
  • Fees for licenses, software creation or permits

Put together a reasonable estimation of the costs involved in starting up your business. It's much easier to determine how much could be paid for from savings, and how much could be borrowed on a small business loan, if you have a clear estimate to work from.

Working capital

Your business working capital is a cash buffer used to help fund your business until it starts collecting payments from customers. You'll need to estimate how much working capital to put aside to help pay for your business' outgoing expenses until it starts generating income. For example, if all your monthly operating costs/overheads (rent, staff, power) total $50,000 a month, then a 6 month working capital buffer would be $300,000. It allows you to build your business over time knowing your costs are covered by cash in the bank for a period of time.

Research costs

While you may be able to uncover most of your anticipated startup costs yourself, there may be instances where you need to seek professional advice as part of your research. Your research costs may include:

  • Advisor's fees for business models
  • Accountant's fees for information on business structures and tax
  • Legal fees for intellectual property protection
  • Market research consultancy for identifying targets and proof of concept

Research your options thoroughly

Spend time researching the approximate cost of the items you think your business will need to get started. Buying new equipment or machinery might be nice, but it may be more cost-effective to shop around for secondhand items.

Shop around

You may also want to shop around for different prices from various suppliers. For example, you could negotiate a better package price for your business' phone and Internet costs or gain a better insurance policy at a lower premium cost. The research you do could save your business significant startup costs.

Prepare a cash flow forecast

Your cash flow forecast will give you a clearer idea of what's required for your business to reach its break-even point and eventually become profitable. The research and planning you do while estimating your business startup costs can also be a great indicator of whether your business idea will be viable or not.

Your cash flow forecast needs to take into account any fixed costs your business will need to pay to continue operating. It will also need to factor in any variable costs that could impact your cash flow.

Fixed costs

Your fixed costs are expenses you need to pay regardless of the amount of sales you make, products you produce, or how busy you are. They tend to be time related, like monthly charges, and are often referred to as overhead costs, such as:

  • Wages and salaries or even contract payments depending on the makeup of your workforce
  • Power and utilities such as electricity and phone service
  • Rent or mortgage repayments depending on whether you're leasing or buying premises
  • Web hosting costs and server space for your website
  • Internet shopping cart subscription fees if you need to sell your goods or services online

Variable costs

Your variable costs, like the name implies, are costs that vary based on your business output. These costs may be based on seasonality (such as produce), or dependent on volume purchased (retail stock). Common variable costs include:

  • Raw ingredients
  • Production materials
  • Stock orders

It's generally a good idea to be conservative by overstating rather than understating your estimates.

At the end of your estimates, consider adding 20% for costs you haven't thought of in addition to cost overruns. You might be surprised at how quickly unforeseen costs add up.

To conclude

Total up these different costs and place them into a spreadsheet to help you determine the overall start up costs you face. Now plan how you will finance these costs from either your own money, someone else's, through loans or a combination. If your start up costs are too high, go back and see how you can minimize any costs such as delaying purchase, using second hand equipment or piloting various initiatives until the business is proven.

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