Starting a business is an exciting experience, but jumping in with no financial planning can be a disappointing one. When building your own company, you get to channel your values and talents to create something you believe in. That doesn’t mean the process is simple. It requires dedication, time, and, of course, money.
Running your own business is huge. You gain freedom and more control over your projects and schedule. However, you also must take full responsibility for your own financial future.
Starting a business from scratch can be overwhelming, so you may not know where to start. Good organization is your best friend. You can plan out everything and keep your startup on track. This is especially important when it comes to finances. Planning out your finances will take the pressure away and help you focus on building your business.
Here are some tips for new business owners to help them be better prepared.
How much money do you need to start a business?
When you are just starting your own company, the more money you have, the better. Cash is king, and the more of it you have, the more focused you can be on developing the business. At some point, you must invest that cash into employees, assets, marketing, and everything else you will need to be successful later.
Depending on the business model and how it is structured, you will have different cash requirements. For example, if you are in real estate, you will need much more money at the start than if you are building a small retail business.
If your company’s industry is a little bit more predictable, you can plan better and know in advance the kinds of payments and purchases you will need. This makes budgeting and business planning much easier.
However, regardless of the type of business you are starting, you must be financially prepared when the right opportunities come.
How to Estimate the Starting Costs of a Business
Most people are overly optimistic when it comes to the income they will generate with their business. Often, they forget about all the costs and investments it will require. They also underestimate the operating costs and other expenses.
This usually happens because of a lack of information. One way to approach it is to ask people who already have a successful business. It doesn’t matter if they are in the same industry or not, they will be able to provide valuable advice. You can contact industry experts, read books about companies similar to the one you want to create, attend seminars, and speak with suppliers and mentors.
Here are the next steps to prepare financially for starting your own business.
Understand the Costs
Before you start estimating your expenses, it’s important to understand the costs and how to categorize them. All new startup owners need to think of the two main financial categories in the business: assets and expenses.
Expenses are all the costs that your business will incur throughout its lifetime. These expenses include operational costs, marketing, office supplies, and deductible items like rent, payroll, and travel. The initial startup expenses will also include organizational costs, legal and state fees, and accounting expenses. These expenses may vary depending on the type of business and the initial strategy.
Assets are things like equipment, inventory, and property. To purchase these items, you will make capital expenditures. Startup assets cannot be deducted, but some of them can be written off through depreciation.
It is important to differentiate these two categories and to keep track of how the numbers change over time. Thus, the best way to do this is to create one list for the expenses and another one for the assets. Here you need to include all the things you will spend money on during the first phase of your business: equipment, tax advisor fees, office space, etc.
Categorize the Expenses
When it comes to estimating the costs, you should first think about your expenses. Are they going to be one-time or recurring? Are they essential or optional? Maybe they are a fixed number every month or variable. Having these points clear will set you on a good path.
Create a startup worksheet and categorize all the expenses you predict. This will help you better understand how much money you will need and for what. Ask yourself if you really need certain things and whether you need to allocate money for them before your business becomes profitable.
Now the interesting part begins, which is assigning your costs. Assign costs to your startup business list; write an estimated cost against each of the items on that list.
Make your best estimate, but also be realistic about the costs you assign. Do some research. Get advice from a financial expert, fellow entrepreneurs, or other small business owners. Look for local business organizations like MBDA, SCORE, or a local organization to guide your cost estimates. The most important thing here is to avoid forcing expenses into the limits of the amount you have saved.
If costs are increasing too much, it’s a sign that you may need to rethink your business approach. Maybe you can run it from home instead of getting an office space right away. You might also be able to subcontract freelancers instead of hiring full-time employees. Evaluate the importance of these things and decide if you need them when you launch your business. It may be better to plan them for a future moment when the business grows. Remember, timing is key!
Project your sales
It is extremely important to do market research before starting a business. This means looking at the current situation of the market. Consider potential competitors, prices, sales volumes, possible customers, suppliers and distributors, and more. This will help you project and estimate your sales.
Your financial projections must also include the equipment and, workforce you will need to produce the goods. Add up the numbers, and you will be able to estimate the monthly expenses of your business.
Determine your financing plan
Now that you have a clearer picture of how much money you will need, you may find out you don’t have enough resources to start your business. Many people find themselves in this situation, so don’t be discouraged. Ask yourself if you can start your business on a smaller scale. Perhaps you can buy second-hand equipment or find a place with lower rent. Maybe you can earn an income more quickly, get a business credit card to get started or wait for a better time. There are many ways to cut costs or find the initial resources you need to launch your business.
The important thing is to stay motivated but realistic. Explore your options before calling the bank.
Here are some alternatives for sourcing finances for your startup:
Government loans & grants
The government has programs that can help with starting your business or scaling it. Additionally, federal grants are available for non-profit and educational institutions in different areas like medicine, scientific research, education, technology, and more.
Crowdfunding is also an option that has helped small businesses around the world thrive. Small businesses in industries like design, technology, and food have benefited from crowdfunding.
Small business loans
Some banks have special programs for startups offering small business loans with very good terms. Research the banks and their products and see which one fits your needs best.
Consider these options because even if you don’t have enough to start, these alternatives will allow you to plan your launch better and reduce the risks of failure.
Manage your Cash Flow
One of the hardest things to get under control when you are first starting a business is your cash flow. It may take clients some time to pay you, or you may need to pay costs that you didn’t. This means the money in the bank is the biggest asset you have as an entrepreneur. It helps you through client storms and eliminates stress. That’s why managing cash flow is so important.
Before you even start, you must know exactly how much your monthly bills cost. When you live on a regular paycheck, you might not dig deep into your budget’s specifics. Some people don’t even have a budget.
Consider your costs of living, such as food, utilities, rent, and entertainment. Then include the expenses you must pay when you are self-employed like health insurance, taxes, and business insurance. You should set aside about 30 percent of your revenue as a self-employed entrepreneur for taxes. Include that amount in your rates.
Beyond that, you also must think about your cash reserve, emergency, travel, and entertainment budget. Once you have your cash flow plan, add it up and divide it by 12. That will show you how much you must earn every month.
You can then break the total into daily or weekly income goals and finally come up with your hourly rates. It’s much easier to run a business when you know how much you must bring in each month, week, or day. This knowledge will impact the number of hours you must work and the clients and projects you should pursue.
Plan your Savings
How much do you need to have saved to start a business? This is a frequently-asked question, but the answer is not that easy. How much you should have in your account is an individual decision and depends on many factors.
One of the most important factors is the number of your monthly expenses. Other important, considerations are fallback options like a second income or emergency fund and your risk tolerance.
If you have three to six months of expenses saved, it’s a good start. Even if you must cut back on entertainment, this amount will give you a good base. If you have saved a year of expenses, that’s even better because you will be free to concentrate on working and growing your business.
Keep in mind that when you become an entrepreneur, everything about your taxes will change. You must make quarterly tax payments, pay your self-employment tax, and possibly, local business taxes. You must have all of these taxes planned in your budget.
Make sure you understand very well what you need to pay in advance so that you can have the cash ready so you can focus on other things. It is very important to be able to pay for everything on time. If you get everything right from the beginning, you can avoid interest, penalties, and worries.
Of course, if you have the promise of predictable work, it is easier to make the transition into a full-time business owner. If you have clients already eager to work with you, that’s great! But even if you are in this situation, think several steps ahead. This will secure your finances in the best possible way.
Think about your future pipeline and marketing efforts. In case you are left with no clients or a project gets canceled, how much time, effort, and money will it take you to find a new client? If you need to spend a month or two looking for new projects, you must secure your finances for this period. Calculate the advertising and marketing expenses too. Your savings must be enough to cover your expenses during this downtime.
Invoicing and accounting
As a new business owner or entrepreneur, your financial situation will be in your hands, and it will be more complicated than ever before. You are suddenly tracking costs and payments, invoicing, taxes, and more. It can get quite overwhelming at times. However, some systems can help you handle these things without paying for an accountant.
You can use software to help you with so many things. From sending invoices to tracking income and expenses to project management, there is a solution for everything. Try Freshbooks, Xero, Trello, Asana, or Slack. They are all great tools to help you stay on top of your finances and projects.
Start with the basic, free packages, and when you scale your business, you can move on to more customizable, premium options. Putting these systems in place before you start helps you keep everything in order without spending too much on each aspect of your business.
Finally, you should meet with an accountant to go over your goals and financial situation. This will cost you a fee, but they will give you a quick reality check on your finances, which is very valuable.
Common Startup Mistakes
In short, here are some common mistakes to avoid as a new business owner.
Don’t Neglect the Research
Startup founders often forget or neglect their research. They simply don’t know how or want to put the effort into finding out how much it will cost to run a business. They jump straight in and learn the lessons the hard way.
Prepare for the downs
A start-up business rarely starts with the sales and profits the founder is seeking. Thus, it is normal to have an initial period of losing money. You must plan ahead of time how much money you need to overcome this period.
Choose your bank carefully
Going to the wrong bank will cost you a lot of time, effort, and money. Pick a bank of a suitable size and understand where it is coming from. Some large banks have startup programs, while others are not interested in those kinds of businesses. Thus, it is important to research your options well.
Keep in mind the costs of growth
Once a start-up becomes successful, some owners realize it takes more than they are making to grow and expand the business. Maybe they will need to hire new team members, purchase larger inventories, and so on. All these things increase the need for capital. Thus, keep in mind all the options for sourcing capital so that you can react quickly when the opportunity comes along.
The Bottom Line
Planning finances is probably one of the most stressful parts of starting a business. But being realistic and planning well will go a long way toward making your company successful. Often in this scenario, the smallest things make a big difference. Saving some more money may take significant pressure off your shoulders. You need a clear financial picture that gives you an idea about the most important variables.
Starting a business is expensive and time-consuming. Many people cannot imagine the amount of effort it takes to create and maintain a successful venture. However, if you are up to the task and you prepare well, you may find times of joy, satisfaction, and financial gains by launching your own business.
Have you ever thought of owning your own business? Let us know how you plan to prepare financially for this big step.