No one truly knows the exact amount they’ll need to start a business. In fact, it usually costs at least twice as much as think. That being said most small businesses start with less than $10,000 in capital. Those funds primarily come from personal assets, credit card debt, and/or family and friends who are willing to invest.
To determine how much you’ll need for your business, start by looking at your personal financial situation. I’m working under the assumption that you plan to start your business as a full-time endeavor, therefore you’ll need enough money to pay your living expenses for a least three months, but preferably six. Whatever you determine your monthly expenses to be multiply that by 1.25% to cover unforeseen miscellaneous expenses.
Now that you have your base, research operating costs for comparable types of business. SCORE (www.score.org), is a free resource that can help you research and analyze related financial models. They can assist you in writing an initial business plan for your company.
Next, calculate your anticipated costs. Because I don’t know what type of business you’re planning to start, it’s impossible to provide a considerable amount of detail for you. A home-based, service business is going to require far less capital than launching a new restaurant. There are a few general categories to consider such as technology and equipment, professional fees, marketing, licenses and permits, and employee or administrative costs. Palo Alto Software provides an online start-up calculator which is a good resource for a more specific analysis.
A word of caution: Don’t be penny wise and dollar foolish. In other words, don’t skimp on the important start-up costs such as getting good legal and accounting advice. Spending money now to make sure things are done correctly can save you thousands down the road — or even prevent a business failure.
Finally, keep this in mind — it typically takes at least twice the amount of money and twice the amount of time as you think you’ll need to build a successful business. In some respects calculating start-up costs is part science and part intuition. I recommend you plan to have a cushion for an unexpected rainy day.
Susan Solovic is a business expert, an entrepreneur and New York Times best-selling author.
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