How to Estimate your Start-Up Costs
The spirit of entrepreneurship is seeing a new stage of development through multiple start-up businesses. The Covid-19 era has changed the rules of doing business resulting in increased amount of start-ups. Entrepreneurs of all scales show interest towards opening a business that would not only bring revenue under the current circumstances but also have an impact on the market.
While experienced entrepreneurs have good understanding of what it takes to open a start-up, the newbie entrepreneurs may be too excited about their business idea and lack knowledge on how to estimate the actual costs for the future start-up.
Let us shed light on how to approach the costs estimation associated with opening a start-up.
Before you start, you need to understand what the nature of your business will be. There are three main types of business: traditional (brick-and-mortar) business, online business or service-based business.
Traditional (brick-and-mortar) business implies that there is an actual location or a building where customers go to get the products. Despite the huge shift towards online shopping caused by the pandemics, many people still prefer the traditional type of doing shopping by going to shops and physically choosing the products they want. This type of business incurs the biggest expenses due to rent, equipment and inventory costs.
Online business implies that customers buy products virtually in the comfort of their homes. While this type of business does not have rental expenses, it requires investments into secure systems, servers and software as well as marketing expenses that will keep the business running digitally.
Service business implies that the business provides specific services to their customers rather than sells goods or items. The range of services is endless – from healthcare and consulting to home repairs and event management. Depending on the nature of business, it can involve a physical premise or operate entirely online.
The most common business expenses associated with opening and running a start-up are as follows:
– Registration/licence (if applicable)
– Office rent and maintenance
– Inventory (equipment, furniture, vehicles etc.)
– Utilities (electricity, gas, water etc.)
– Communication (mobile/landline phones, messaging apps)
– Web and software development
– Professional insurance
– Marketing and advertising
– Research and analytics
– Professional services (tax, legal, accounting).
Once you have determined your business type, the next stage would be to identify your assets. Start-up assets are the money or valuable materials that you have to put into your business to launch it. These should be kept in records separately from your business/operational expenses, as the latter are tax-deductible.
The most common start-up assets are:
– Computers and hardware
– Other equipment.
Having your assets and business costs calculated, you need to do a breakeven analysis. This analysis allows estimating at which point your business starts to be profitable after covering the costs invested into launching the business. In order to get these estimates right, you need to make the list of costs as detailed as possible to include every possible expense and predict contingencies, including annual inflation rate, taxes, currency fluctuations if applicable etc. The more thoroughly you do it, the more accurate picture you will have as to your business profitability in the future.
Now, what do you do if you do not possess enough cash to fund your start-up?
You look for investors. This is yet another reason why your numbers should be as accurate as possible. Investors will evaluate possibilities of doing business with you based on the report you present to demonstrate that your business has good profitability potential.
Another important compound for your business to stay viable is a financial plan, which is an estimation of the current performance and projections for growth. The financial plan is a necessary tool for determining short and long-term plans as well as developing strategy for your start-up.
Getting your numbers rights may not be the most creative thing to do, but believe us, it is an essential part of any business that helps to critically evaluate your chances for a successful start-up and potential growth.