One of the reasons making a business plan is a good first step in starting a business is to answer the basic key question, which is how much money does it take to start the business. I have two good friends, they engaged in different businesses in different years, they were very strong at the beginning, but they failed due to exhaustion of resources.
In the first case, if my friend plans better and applies for a larger loan, he may be able to get additional funds. But when things got worse, his credit suffered and he couldn’t ask the bank for more money. As for my second friend, if I had a more detailed estimate of the initial cost, I could plan to use fewer resources and increase it more successfully.
The key is to have an educated idea about start-up costs that can benefit your business, rather than having no plans at all and facing more unexpected surprises. The key is to treat your business expenses as separate components.
You can calculate the startup cost by making three simple lists, some educated guesses, and then adding them together.
1) List asset expenditures.
Your business assets are what you need to use in your long-term business. For example, if you want to open a physical store, it may include items such as shelves, tables, cash registers, etc. Graphic artists may need specialized printers and drawing tablets.
If you are manufacturing or selling products, please consider the inventory you need to have in advance. The simplest example is a bookstore that needs to store books on a shelf or raw materials that a manufacturer may need when starting to assemble a product. If you are in a service business, which means you are not manufacturing or selling products, don’t worry about inventory. You can skip this step.
All these items constitute your initial assets. Although you might also consider the funds in your bank as an asset to be listed here, we will save it to another list later.
2) For each item in this list, make an educated guess about the amount of the fee.
If you can’t estimate the price of an item overhead, do some research. For example, call a real estate agent to ask about rental space and prices. Contact an insurance broker to check insurance plans and prices.
Important note: Although computers and office equipment should logically be included in this list, the federal tax law allows us to deduct their costs from taxable income as expenses, which is why most accountants recommend calling them expenses, and Not an asset.
3) List expenses in expenses.
Not everything you buy is an asset. You also spend money on expenses. For example, it costs money to establish a legal partnership, limited liability company, or partnership. The money you use to build a website, the cost of decorating your office, and the salary you pay employees to help you build it are also examples of expenses.
Also, due to the special tax treatment I mentioned above, the cost of computers and other office equipment is included in this list.
Now, add your starting assets and starting costs to calculate most of the starting costs.
4) Determine how much money you need to get started.
The last part of the puzzle is to know how much cash you need in the bank in the first few months when the sales generated by your start-up will not be enough to cover the costs and expenses.
There are several theories on how to do this. Some people say that you need enough money to pay for six months. Others say one year. But in my experience, this is not usually that easy.
5) My suggestion is to estimate your sales for the previous 12 months and the costs and expenses of those sales.
To help create sales forecasts, you may need to refer to one of my previous columns. You may also consider reading the section on creating a spending budget in my “pay-as-you-go” business plan.
You should end up with a 12-month list containing estimated sales, costs, and expenses for each month. Subtract costs and expenses from your monthly sales, and the result should show whether you are short of cash. You can find out from this spreadsheet how many months it will take to break even and how much money you have lost. This is basically what you need as starting cash.
If you hesitate to make a business plan, you are on your way after calculating the numbers here.
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