Financing Your Future: Estimating Your First Business Costs
Launching a new business can be an exciting prospect for ambitious entrepreneurs today. However, it is important that prospective business owners understand the costs associated with a new startup in order to avoid problems later down the road. Expenses like employee costs, fixed rent payments, monthly service bills, and itemized product costs must all be factored in to a business plan from the beginning. Since lack of adequate capital is one of the primary causes of business failure, carrying out these activities is quite important to realizing success. Below is an overview of how businesses can estimate the initial costs of launching a new enterprise and how to organize your costs.
Develop a Solid Business Plan
The first step to launching any business is carrying out sound research into a business plan. Competitors, customer demographics, prevailing industry standards, regulations, market leaders, and much more should all be considered. Individual concerns like the best demographic location should also be thoroughly studied. By doing this, entrepreneurs should have a good idea of costs that will be required at the start of launching the venture. Business owners that have already launched and neglected this step should take some time off to catch up on the demands of constructing a good business plan. Good organization is the most important step.
Consider Office Space
Commercial office space can be quite expensive, with rates generally around at least a couple thousand dollars per month. Businesses with no sure path to profitability should have at least two years’ worth of capital on hand in order to cover these expenses while working to toward this goal. Businesses that are just getting started might even want to consider working from home or getting a shared office in order to reduce these costs. Retail stores might even want to lease office space with the help of another store and sharing the retail location to pool risk and costs.
Factor in Employees
In many businesses, employees are essential to smooth operations. Entrepreneurs should ensure that they have raised enough capital to cover employee costs while attempting to realize profitability. In many cases, the calculated figure should be doubled to account for natural errors and having to hire specialized individuals that can be quite expensive. Companies can also consider outsourcing some of their operations to specialized companies with more info like MapADataCenter.com.
Remember Raw Material Costs
Manufacturing businesses should not neglect factoring in the costs of raw materials that will be needed for initial batches. Unless customers are paying upfront, a business will most likely need to cover the full cost of an initial batch of products. This can be quite expensive and needs to be factored into the initial company business plan.
Everything Adds Up
It may seem obvious, but when developing a cost estimate for launching, it may be simple to minimize the impact of small extras. These can add up quickly even though they generally don’t come to mind when factoring in costs. For this reason, entrepreneurs should be conservative in their cost estimates throughout the entire planning process.
Add In Debt Payments
Many businesses that launch today forget to add in costs associated with the debt that they plan to take out. For example, if a prospective business owner determines that $250,000 will be needed to start, the cost of servicing this debt needs to be included as well. In many cases, this can increase the required amount of initial capital by 20-40%. Especially for ventures that carry higher interest rates due to their risks, it is important to keep these considerations in mind. Businesses should also keep in mind loan amortization and how it will cause the debt to be paid off slowly at the beginning of the loan’s term. Resources might therefore not be available from refinancing or avenues that business owners might be expecting to fall back on if extra capital is needed.
By following the steps above, prospective business owners can expect a greater chance of success and have less stress when starting up their business.
Brooke Chaplan is a freelance writer and blogger. She lives and works out of her home in Los Lunas, New Mexico. She loves the outdoors and spends most her time hiking, biking and gardening. For more information contact Brooke via Twitter @BrookeChaplan.
Category: Business
