You’ve done it! You have come up with an idea for a business that will revolutionize how we do something – interact with others, drink our coffee, paint our houses, etc. You believe that if you can start a business, the money will start pouring in and you’ll be living the high life. Unfortunately, starting a business is not as easy as Hollywood or those “Get Rich Quick” books make it out to be. What they often fail to mention are the countless hours spent sweating the small stuff in order to make the business a success. Before you spend all of your money and deplete your savings account, run through this checklist as your due diligence before you take the plunge into entrepreneurship
Welcome to our 3 part series on things to consider before starting a business! We hope it’s informative and you get a new perspective and some help on getting that business off the ground.
Are Your Ready for the Lifestyle Change?
Starting a business takes a lot of time and dedication to get off the ground. Enea Gjoka, founder of App development company Unlimapps warns, “I spent countless hours not just writing code but actually doing market research. I practically had no social life for the first two years of my business.” When breaking into a new market or an already established one, you have to work harder and smarter than the next entrepreneur. It’s this lifestyle change that catches a lot of new business owners by surprise.
Simon Yu, creator of the YuCan education app, shared his experience leaving the world of investment banking in New York and starting his own app. “I was already used to working long hours in my previous position as an investment banker, but I don’t think I fully knew what I was getting myself into when I started my own thing. I wanted to start my business because I had something I was passionate about and I wanted more freedom for myself as an owner. I’m still passionate but i’m still waiting on the ‘freedom’ part.”
Before committing all of your money and resources into your new business idea, think about if you have the ability to devote the time you need to. If you’re married with a wife and kids and already have a full time-job, then this is the first question you should ask yourself.
How Much Money Do I Need?
You can have the greatest idea, but if you don’t have the the funds to start your business, then you’re out of luck. So how much money do you really need? The Kauffman Foundation found that the average startup uses about $30,000 to get off the ground. However, not every startup is the same and in a recent survey by financial software company Intuit, 64% of business start with less than $10,000 of capital. Yes, having more money when you start will definitely make your life a little easier, especially in the first couple of months where you feel like all you are doing is spending. Moreover, 68% of small business owners regret they didn’t spend more time learning about financial management. Here are some things to begin thinking about when it comes to the financial health of your business:
Initial Start-up Costs:
In order to get your business of the ground, you’ll need to make some basic investments and depending on what type of business you start, that could be very substantial – usually a business with a physical location will have a higher upfront cost than a software company. In addition to physical space, you will also need to purchase things like a business license and incorporation fees. It definitely important that you take some time to think about your expected costs could be.
These expenditures can be lumped in with your initial costs but it’s great to think about it separately. Your capital expenditures can range from buying machinery for your new home building business or purchasing office furniture for your new accounting firm. It’s best to shop around and find a vendor that is willing to work with you to get your business the best deal possible. Your capital expenditures will also be determined by what type of business you plan on starting. If you envision your company as a luxury brand then perhaps you are going to consider spending more on furnishing were a technology company may spend more money on state-of-the-art computers and an innovative online presence. Some examples of capital expenditures:
- Business Cards
- Computers or Software
- Office Equipment
- Heavy Machinery/Vehicles
- Office furniture and supplies
- Website Development
- Office leases
In the most basic form, your operating expenses are the cost of keeping your doors open to your customers. In an ideal world, you begin having sales from day one and you have more orders than you can handle. A more realistic scenario, however, is that it may take a couple of months before you actually get any sales. During those crucial first months, you will more than likely be focused on building brand recognition with your prospective clients. During this time, make sure you keep track of everything that you spend your money on so that you can begin forecasting your month to month expenses. It also helps to talk to other business owners who have opened up a similar business. You’ll be surprised how willing business owners can are to share their stories.
You may think that you’re going to do it all in the beginning but you’ll soon realize that your time may better spent growing the business instead of dealing with state and federal reports. If you have a bookkeeper or accountant, a marketing manager, a janitor or any other service that you outsource, it’s important to think about how quickly costs can add up. Professionals are a great asset if you have the funds you need and can really give your business a boost, but think about if this is a need or just simply a want. When tackling hired services, it’s best to be frugal.
Something that a lot of new business owners don’t think about is their own personal expenses. They focus on the expenses of their new business that they often underestimate how much money they need for their personal expenses. When starting a
new business, it’s important that you have 6-12 months of living expenses set aside. Before you quit your job and take on entrepreneurship, take a look at your bank statements for the past couple of months and see what your expenses really are. Most business owners don’t pay themselves when starting their company, instead choosing to put everything back into their company. It’s best to think about your possible future expenses. Do you have monthly car payment or student debt payments to make? Do you owe association dues for your condo or expect a large car repair bill soon? It’s best to plan for the future by looking at past tendencies and habits. Yes, you will more than likely be tighter with your money when starting out but it’s best to be realistic.
Estimating How Much You Need
Every company that fails does so not necessarily because they didn’t have a great product or idea, but because they ran out of money. It’s important that you think about the above mentioned expenses when trying to determine how much money you not only need Day 1 but also Day 365. Track all of your expenses and analyze your monthly cash flow, reach out and talk to other business owners in your field, think about what outsourcing you will do, and determine how much you need for your own personal finances. The number that you can come up with may be $100,000 or $2,000, but regardless of the number you will be financially prepared to start your company.