Jan 142012
 

Do you really know how much it costs to start a small business?

While starting a small business can be an exciting time it can also be an expensive time too. If you’re starting from scratch you need to have a good idea of what costs are going to come your way and make sure that you can cover them all, plus extra to keep you going for the first few months (your working capital).

Start up costs will probably feature in the financial part of your business plan as just a single line, but before you get there you need to have broken it all down so that you know you’ve captured everything.

As a rule of thumb you need to add together all your costs and operating money – then double the original estimate. Sounds a little extravagant but people generally tend to underestimate and besides, if you do stick to the original amount then you’ll have a little more money available for advertising etc once the business is up and running.

Initial start up costs

These are generally the costs to get you up and running. Some of them will be one off (such as company registration, web design, IT equipment etc) but others will be recurring (rent, website hosting, telephone, electricity). Don’t forget to include some money for marketing too (but see Discretionary costs below).

If you’re buying a franchise then the franchise fee will probably be the biggest start-up cost of all. Make sure you know what you get for the franchise fee – for example some franchises may provide stationary as part of the package which means you can knock it off your list. Before signing the franchise agreement make sure you’re registered for tax so that you can claim back what will likely be quite a large sum.

The other big start up item can be your initial stock. Again, negotiate with the suppliers to either purchase a smaller than normal order, ask for a better start up price or see if they will waive part or all of the initial payment for a month or two.

Always be on the lookout for bargains as you will need to conserve as much money as possible to use as working capital. So, do you really need the latest, top of the range PC, or could an older and cheaper model keep you going for a year until you’ve got regular money coming in? Also, do you really need to rent an office? Some businesses can be run successfully from home but others do need to be on the high street. But don’t take the landlord’s first offer – try to negotiate for a rent free period (especially if the office is empty) to allow the business to get going.

Recurring business costs

Recurring costs are those monthly bills that need to be budgeted for like electricity and telephones. Make a list of them all and see what savings can be made by using automatic payments or online payments. Check to see that you’re on the most appropriate payment schedule for what you need (the salesmen will always be trying to tempt you to the gold plated package which you don’t need at the moment).

Make sure that you have a good budget spreadsheet with all of these recurring costs written down so that you can keep an eye on your cashflow.

Discretionary costs

You really shouldn’t have too many of these at this stage, the main one will be how much you spend on marketing the business. This is a Catch-22 situation – you need to market to get customers but that means money out before money comes in. Also, you don’t know what marketing will work for you at this stage and what might be a waste of money.

My recommendation when you initially start up is to market your business through your time and energy rather than through your bank account. You’re the best advert for your business and face to face networking is the best way for people to build trust in you and the business so concentrate on that for the first few months before thinking about glossy ads and cost per click campaigns.

Summary

Getting money to buy a small business or start a small business generally means starting things on the cheap so every penny counts. Hopefully, the tips and ideas above will help you make a success of it and avoid any surprises.