One of the facts of having a business plan is a good first step for starting a business is to answer the fundamental, and critical question of how much money it will take to get the venture started.
The point is, having an educated idea about start-up costs can benefit your business more than not having a plan at all, and facing more unexpected surprises. The key is to look at your business expenses as individual components.
List Spending On Assets.
Your business assets are the belongings you need to use in your business over the long term.
If you’re either creating or selling products, think about the inventory you’ll need to have at the start. If you’re starting a service business — meaning you don’t make or sell products — then don’t worry about inventory. You can skip this step.
All of these items make up your starting assets. While you might also think the money you have in the bank is an asset to list here, we’re going to save that for another list later on.
One Important Note: Although PCs and office equipment should logically be included on this list, the federal tax code allows us to deduct their cost from our taxable income as expenses, so most accountants recommend calling them expenses, not assets. We’ll get to these in the next list.
List spending on expenses.
Not everything you purchase is an asset. You also spend money on expenses.
Now, add up your starting assets and your starting expenses to calculate most of your starting costs.
Determine how much money you’ll need to get started. The final piece of the puzzle is knowing how much cash you’ll need to have in the bank for the early months while your start-up is going up and not generating enough sales to cover costs and expenses.
There are a number of theories on how to do this. Some people say you need enough to cover six months of expenses. Others say a year. But in my experience, it’s usually not that easy.
My suggestion is to estimate your first 12 months of sales, costs of those sales and expenses. To help create a sales forecast, you might want to reference one of my previous columns. You might also consider reading the section on creating an expense budget from my Plan-As-You-Go Business Plan book.
What you should end up with is a list of 12 months with estimated sales, costs and expenses for each month. Subtract the costs and expenses from the sales for each month, and the result should show you whether you’re short of cash. You’ll be able to tell from that spreadsheet how many months it takes to start breaking even and how much money you’re missing. That’s essentially what you need to have as starting cash.
And if you were hesitant about putting together a business plan, you’re already well on your way after calculating the numbers here.