The majority of new businesses don’t make it through the first 12 months. You don’t want to be part of that group, right? The odds are against you, however, with a good plan around start-up costs, you can beat them!
A main reason for businesses to go out of business in the first year, is the lack of working capital and funding. Their expenses have not been planned out properly and at the same time, their income has been overestimated when starting off. To avoid this trap, we’ll guide you through some principles on how to calculate start-up costs correctly and realistically.
No projection is exact, that is something you must never forget. However, it is crucial you really try to understand what a real cash flow model for the first year could be. Don’t dream, don’t start overestimating, don’t exclude expenses although you know they will occur, don’t minimize expenses, etc. Be realistic, be disciplined. Incorrect and wrong numbers will result in failure along the way without a doubt.
Identifying Your Start-Up Expenses
All businesses are different and therefore all start-up expenses are different. For an example, if you’re created an online boutique, you’ll need to think factor the domain name cost, or packaging and delivery costs. On the other hand if you’re starting a brick and mortar boutique, you need to think about rental, hangers, clothing racks, and more. Look at what is relevant for you and think outside of the box. You don’t want to lose out on expenses when planning, as they will be a burden on your cash flow later. Get advice from established entrepreneurs while speaking to other business owners in the industry. Comprehensive planning is key. Don’t take this part lightly; think as broadly as you can when identifying future costs.
Identify Your Assets
You will not only run into operating expenses, depending on your business model, you will also need to invest in assets. This could be as simple as office space, furniture and laptops to a delivery truck, real estate, a kitchen, coffee machine and much more.
Ensure again that the list of assets you will need is 100% complete.
Add Up Your Expenses for a Full Financial Picture
Once you have identified all the above, add all costs together and map them out over a twelve months timeline. Doing so will give you a more detailed picture of how the first year will look like. Don’t forget to take seasonality into account. One-off events like Valentine’s day and Mother’s Day might have an impact on your planning.
Having an overview of the total costs for the first year lined out, is a crucial moment for young entrepreneurs. This is an absolute tipping point as future business owners now need to make the decision whether the numbers will allow them to pursue their business idea or not.
It’s important to make rational decisions at this stage. If the numbers don’t add up, you should continue to find ways to tweak the plan or model in a realistic way or understand that the business model will not work out. Although we can perfectly imagine the amount of time you’ve spent on preparing and researching, imagine where you would end up starting off a business you knew was going to fail?
You Got a Good Plan? Let’s Find Funding!
You have a solid plan and your numbers add up? Good! Start looking for the capital you need to get your business going. We suggest exploring bank loans as well as private investors. Before doing so, run your plan through at least five people you trust. This could be a professor at university, a friend, an independent advisor as well as family or other business owners. You always want to get a second opinion in advance. Fresh eyes on a subject will always give new insights and learnings you never thought of or it will help you prepare for investor questions to come.