Practical Ideas, Practical Discussion – Part 2 of 7: How Much Money Do I Need?
Many entrepreneurs underestimate how much money they need to successfully start their new businesses. Not getting off on the right foot financially can put an end to a business before it even really begins. Finding that “magic” number involves a four-step process: 1) Calculate startup expenses; 2) Define assets; 3) Determine ongoing monthly expenses; and 4) Calculate monthly sales
1. Calculate Startup Expenses
First let’s take a look at startup costs. You’ll need to budget for these types of expenses:
- Creating your legal structure (check out the Legal & Tax section on the Tools page)
- Accountant
- Rent / Decorating / Remodeling
- Licenses and permits; insurance
- Stationery and logos; marketing and sales material; signage; website
- Phone, Internet and utilities
(Note: check out our Small Business Connect B2B Network for resources.)
2. Define Assets
Now, what about defining those items essential to running your business? We’re talking about things such as real estate, furniture and fixtures, equipment and machinery, trucks and autos, inventory and office supplies. Make a list and estimate the total cost for purchasing only those things that are essential to running a successful business.
3. Determine Ongoing Monthly Expenses
Your ongoing monthly expenses will include obvious items such as rent, utilities and payroll. But the list doesn’t stop there. Don’t forget to budget for:
- Owner’s draw
- Insurance and taxes
- Transportation and shipping
- Legal and accounting
- Advertising and marketing
- Inventory and supplies
- Debt payments
- Working capital
Now, when you have a total for your monthly expenses, do this:
- Multiply the total by six: this is what you will need to run your business for six months
- Add the “by six” total to your startup expenses and the total of the assets you need to purchase
- You now know how much money you need to open the doors and keep them open for six months; remember, it is ideal to have a minimum of six months of working capital in the bank before you start
4. Calculate Monthly Sales
With this information, you can now calculate your monthly sales. In other words, by understanding your startup and monthly expenses, you can determine what you need for a break-even sales total. Depending on your business, break that number down to the smallest amount you can – think in terms of daily sales and daily expenses.
Knowing your numbers is powerful: it provides confidence and it demonstrates a real understanding of what’s necessary to succeed. If you’ve got questions, please post them in the comments. Otherwise, contact us through Small Business Connect so we can help. If you missed last week, check out Part 1 of 7: The Essentials to Starting a Small Business and don’t forget to tune in next Wednesday for Part 3 of 7: Exploring Financing Options.
Tags: Financing Your Entrepreneurial Dream