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Entrepreneurial Dilemma: Do I Have Enough Money to Start My Own Business?

[fa icon="calendar"] May 17, 2019 12:30:00 PM / by Benetrends

You have come up with a great idea for your own business, one that you are confident will be financially, personally, and professionally fulfilling. You are ready to start developing your business plan, doing market research, and testing marketing ideas.

How much money will you need to bring this idea to fruition? What kind of finances will you need to get things started and how much will you need on a monthly basis going forward?

These financial questions are often ones that keep entrepreneurs up at night, worrying about how much money they will need to be viable and successful.

It is a classic entrepreneurial dilemma: do I have enough money to start my own business?

Fortunately, most up-front and ongoing costs can be identified at the start of your ideation. Doing the work to build out your budget will bring you peace of mind and a foundation to use when pursuing small business funding. Here is a closer look at the framework you should use to determine your business costs.

What will it cost to open your business?  Find out with our business planning calculator.

Why Knowing Startup Costs Is Important

Startup costs give you and others a clear idea of what it will take to operate your business. Too many small-business owners underestimate their costs and end up playing catch up, undermining their growth or forcing them out of business. There are several benefits to projecting these costs:

  • Profit Analysis. Knowing what your costs are, along with your revenue projections, helps you estimate your profitability, including when you are likely to break even and how long you may be operating at a deficit.  
  • Investor Expectations. If you are seeking investments to help finance your business, investors will want to see your startup cost analysis.
  • Loan Approvals. Lending officers, like investors, will want to know what it takes to open the doors and keep them open when considering your loan application.
  • Tax Planning. Anticipating your business costs helps you and your accountant plan your tax strategy by understanding what will be deductible when it comes time to file your taxes.
  • Peace of Mind. There is stress in starting a business. A clear-eyed understanding of your costs eliminates one uncertainty in the process.

Questions to Answer Before Building Your Cost Estimate

Once you have affirmed your business idea, consider the following before making a cost estimate projection:

  • What you will need to open your doors on Day 1
  • What you can contribute, such as furniture, to lower costs
  • What donations you can ask of from relatives or friends
  • What you can do without

While the answers to some of these may change as you assess your financial needs, defining them at the outset helps to provide some clarity.

Understanding Cost Types

Not all costs are the same. Understanding some of the different types of costs and what is included in these cost categories is important.

One-Time and Ongoing Costs

One-time costs are those that are necessary upfront to get the business going. They may include franchise fees, company incorporation filings, land or building purchases or a one-time equipment purchase. Ongoing costs are those that are paid regularly and are usually predictable and consistent month after month, such as rent or utility expenses.

Fixed and Variable Costs

Fixed costs are those that are intractable and must be paid no matter what the revenue outlook is. Rent is considered a fixed cost. (Costs can fall under multiple type categories). In the early days of a business, fixed costs are likely to consume a larger portion of your revenue. By contrast, variable costs are those that are dependent on other factors, such as customer volume. For example, if you own a hair salon and you begin to attract more customers (which is a good thing!), you will need to buy more care products, shampoo, shaving cream, wax and cleaning supplies.

Essential and Optional Costs

Essential costs are those that are critical and necessary for the company’s continued operations and growth. Optional costs are for things that are nice to have but not necessary.

Florist shop.

A Closer Look at One-Time Expenses

The following are some of the most common one-time expenses new small businesses are likely to incur:

  • Franchise and licensing fees: If you opt to purchase a franchise, the franchisor will expect an upfront fee in order use the company’s name, logos and other branding assets, marketing expertise, and operational plans.
  • Equipment: These major capital expenses are, hopefully, one-time or rare occurrences. They may include large machinery or basic operating tools such as cash registers, filing cabinets, desks, and other furniture.
  • Initial Inventory: This expense will become a variable ongoing expense over time. However, at startup, your business will need an initial purchase of inventory of the goods you will be selling.
  • Technology: Most small businesses will require technology to operate. These may include computers, servers, software programs, and network infrastructure. Photocopiers and scanners along with telephone systems and other communications tools are also included in this category.
  • Fixtures. You will need a bathroom for employees and guests. You may provide a break room that may include a sink, microwave, and refrigerator. Especially if you are building out a property you lease or own, these costs need to be factored in.
  • Office Supplies. Paper towels, pens, paper, printer ink, and other office supplies need to be available.
  • Deposits. You will be required to pay deposits on several items, including for some utilities, or for leasing any space. 
  • Insurance. Your insurance carrier may require prepaid premiums on any insurance policies you take out on yourself, your business, or your employees.
  • Licenses and Permits. These fees vary based on the type of business, but you may require licenses or permits to operate, including from local or state health and occupational safety agencies. 
  • Professional Services. Before starting your business, you will need to enlist help from professionals, such as legal, accounting, payroll and business funding provider.
  • Marketing. Your business will need print materials, a logo design, a website, advertising across multiple channels, and marketing campaigns to help you get the word out.

Some of these expenses are purely one-time. Others are one-time expenses to open the doors and ongoing expenses. 

Looking At Ongoing Expenses

Once the doors are opened and the business is up and running, the expenses do not stop. You will need to factor in the following expenses as part of your monthly costs:

  • Salaries and Wages. You will need to pay your employees and yourself. Factoring in the total costs of each employee means including not just salary and wage expenses, but also federal and state payroll taxes and employee benefits.
  • Commissions. If you pay salespeople on a commission basis, it is important to anticipate these monthly costs, even if commission payouts are done on a quarterly or annual basis.
  • Rent or Mortgage Payments. Your landlord or lender will want to be paid on time each month for the space you occupy.  
  • Loan Payments. Repaying your lenders needs to be a priority to keep your credit rating up, avoid penalties, and maintain strong relationships with financial institutions.
  • Franchise Fees. Franchise owners pay an ongoing percentage of their monthly revenue to the franchisor. In addition, some franchisors may charge a pooled marketing fee to allow franchise owners to capitalize on national, regional, and local marketing initiatives.
  • Equipment Lease Payments. It may not be feasible or practical to buy your equipment outright, which is why some small business owners lease equipment instead. These lease payments are typically made monthly. 
  • Taxes. Factoring in sales taxes and other federal, state, and local tax liabilities means there are no surprises when it is time to pay up. 
  • Credit Card Fees. There are two types of fees – those paid to credit card companies to allow you to accept payments and those paid to processing companies that complete the transaction and route money to your account.  
  • Travel Costs. Will you or your team be traveling to meet with customers or prospects? Attendance at trade shows, conventions, networking events, or other business functions should be factored into your costs.
  • Memberships and Subscriptions. Joining local or national trade organizations can provide valuable connections and insights. So, too, can subscriptions to journals, newsletters, and proprietary website content.
  • Repeated Costs. The following upfront costs detailed above will become monthly expenses:
    • Inventory
    • Technology (such as website maintenance fees or phone charges)
    • Office Supplies
    • Insurance Premiums
    • Professional Services Fees
    • Marketing
  • Miscellaneous. The unexpected should be expected. While you should try to factor in all the known costs, you should also have some flexibility for those unanticipated expenses that arise.

Finding A Partner

Developing a new business is an exciting venture. Taking the time to thoughtfully plan out your costs helps to make the rest of the process that much easier and fulfilling.

Small businesses are the lifeblood of the American economy. That is why Benetrends specializes in supporting small-business owners. 

We pioneered the Rollover as Business Start-Ups (ROBs) funding model, which helps entrepreneurs use 401(k) and other retirement fund assets to start and grow businesses. While we provide retirement plan servicing, we have partnered with providers to help you with credit card processing, payroll management, legal services and business insurance. To learn more about how Benetrends can support your business, calculate how much you need to start your business.

Benetrends

Written by Benetrends

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