According to a U.S. Bank study, 82% of small businesses fail because of cash-flow issues, while economic uncertainty is one of the biggest challenges these companies face. To avoid running out of money, one of the three most common reasons why companies fail, you’ll need to do a thorough assessment of the start-up costs, before taking a leap into entrepreneurial waters.
Startup costs include all expenses you have for setting up your company and getting it to the point when it’s ready to begin making profits. When making your calculation, here are some key factors you should take into consideration.
What to include?
Before making your costs assessment, you should make a list of every anticipated start-up and on-going cost you might have. It’s a good idea to thoroughly research your industry and take into account all industry-specific costs. Here is a model you can use for categorizing your costs.
Pre-trading costs. This category includes all costs and expenses you’ll have before you start trading. This may include costs of obtaining various licenses and fees, articles and legal fees of incorporation, costs of registering your domain name and your trademark, etc.
Administration. These figures usually include state fees as well as ongoing fees. Also, expenses related to accounting, filling, bookkeeping, and insurance fall into this category.
Marketing. Start-up costs related to marketing include the costs of the market research, advertising and promoting your company’s launch. Ongoing promotional costs are also part of the equation, as well as your logo and webpage design and development.
Operations. When calculating operational costs, you should include your starting equipment and inventory purchase as well as any tools or materials you need to purchase to get your business started and going. Different types of supplies and on-going monthly costs of telephone, internet, website hosting, etc. also fall into this category.
People. Include the costs related to your employees in this category, their wages, salaries, and benefits.
Space. When it comes to the costs related to space you’ll be doing business in, be sure to include the rent and the utilities on monthly basis, paying a deposit for rental space, remodeling the space, purchasing office equipment, etc.
The devil is in the details
When making a financial plan for your start-up, in order to make it accurate and relevant, it’s best to research each cost individually. This can seem like a tiring task, and it will be, but it will save you from headaches once your business starts the ball rolling.
The trick is to pay attention to details and try to get most of your expenses included in your plan so you wouldn’t have to rely on the downpour of customers to cover for them. And we’re talking about situations such as:
- If you’re considering a personal-loan application to cover for the part of your startup expenses, make sure you’ve taken into account monthly borrowing costs too.
- When planning for personnel costs, try not to underestimate the expenses, as you want your employees to be motivated and feel appreciated, so make sure to include decent salaries, wages, and benefits.
- Make sure you set some money aside for unexpected or additional costs so that you won’t have to make tough decisions when times get rough.
- If you or your employees would be traveling to work, or to conferences and trades, try to estimate these costs too.
- Check how much accountants and attorneys charge for their services and provide for such costs too.
A good idea is to reach out to other business owners, industry associations and service providers to get the most accurate estimates of the expenses.
When making a financial plan, the goal is to make a profit, with your estimated expenses lower than your estimated revenue. Average net margins vary by the industry, from the average net profit margin in advertising being 3,10% to 12,11% in restaurants and the dining industry.
Learn how to keep your cash-flow healthy
Once your business is out on the market, you have to monitor closely your finances, in order to keep your cash-flow healthy and your business running. This mostly means sticking to your startup financial plan, purchasing only what you’ve planned and paid your bills and taxes on time.
Time is also a relevant factor you have to consider when it comes to securing your cash-flow. Even if you send invoices promptly right after your job is done, and you have various payment methods to suit all your customers, your payments may still come later, after your loan payments are due.
The key to the success of your small business startup is to calculate your costs well and make a thorough plan of your start-up and ongoing expenses. If you fail to do the planning properly, chances are great you’ll be facing many challenges on the way.
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