Estimating Start-Up Costs for a New BusinessPosted by Jessica Oman
A good place to start when writing a business plan is with an estimation of your start-up costs, including both assets and expenses. This is the money you have to spend on your business before you ever open your doors. Too often, I meet with hopeful entrepreneurs who believe they can open businesses with impossibly low budgets. Bootstrapping definitely has its advantages as a start-up strategy (hey, we did it here at Write Ahead), but it can pose a big problem when asking for start-up funding.
The Problem with Start-Up Bootstrapping
The problem with underestimating start-up costs is that you may find yourself out of money before the business ever launches.
Lenders and investors look for this issue when reviewing a business plan, so it’s important to get it right. It’s better to overestimate and have money left over than to run out of capital and have to beg for more money because you didn’t properly plan.
How to Determine Start-Up Costs
Start a spreadsheet and divide it into two main sections: Costs and Financing. Subdivide Costs into Assets (tangible costs) and Expenses (things you pay for but don’t exchange for a physical thing, such as consulting fees). Then start listing all your cost items (don’t worry about the actual numbers yet) under each category. Don’t forget to list Cash as an Asset! You need some money in the bank in order to open your doors.
When you run out of line items, start filling in the dollar amounts. Call around for quotes on items like insurance, leases, web design, renovations, legal fees and permits. Ask colleagues in the same industry, if you know any, to give you some guidance. Visit a small business resource in your local area, such as Small Business BC (in Vancouver) or Enterprise Toronto (for the GTA), and see if they have sample business plans for similar businesses. Or, use an online start-up calculator. When you’re done, add 10% to everything you’re not absolutely certain of. You’ll be glad you did.
Allocate Your Start-Up Funding
When you know what your business will cost to launch, determine how to fund it. Divide your Financing section into Debt financing and Equity financing. Do you have any of your own money to invest? Add that to a line called “Owner’s Contribution” in the Equity section (hint: lenders and investors like to see you put some of your own capital in, as it’s a sign you’re confident about your business’s potential). If you’re looking for investment, add that number to the Equity section. Whatever’s left over will probably be funded with Debt.
Add your equity funding and debt funding together and it should equal your total start-up requirements.
How are you calculating your start-up costs?