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Fueling Up

Explore these options to make sure you have enough money to start your business.

When Joanne Mitchell left her corporate job six years ago, she was excited about testing the entrepreneurial waters. But before she hung out a shingle announcing her services as a medical-claims billing specialist, mitchell carefully planned her start-up.

"I calculated how much money I'd need to start Mitchell Medical Billing by estimating costs for software, business manuals, computer, printer and brochures to market my services. Then I figured out how I'd raise the money I needed. This planning gave me added confidence about getting my business off on the right foot," says the San Diego entrepreneur, who has also founded Pacific Medical, a training academy which helps individuals start their own medical-billing businesses.

Estimating your start-up costs is indeed essential to business success. "The most common reason small businesses fail is running out of cash," says David H. Bangs, Jr., author of Business Planning Guide: Creating a Plan for Success in Your Own Business (Upstart, $22.95, 800-235-8866). "Typically, a business is undercapitalized. It does not have enough capital to cover all its start-up costs plus a cushion for expected losses during start-up," notes Bangs. How much money will you need to get your business up and running? Consider these key factors:

One-time costs. Begin by estimating expenses you'll incur only once to start your business. These include furniture, fixtures and equipment for your office (such as a desk, chair, computer and software), fax machine, modem, phone system, lighting, filing cabinets, bookshelves and other items. If you're opening a retail store, you'll need counters, storage shelves, display stands, a cash register, window display fixtures, and outside signage.

Other one-time charges include: deposits for public utilities and lease of office space; installation of phone systems; licenses and permits; professional and accounting fees; first-year premium for a business insurance policy; and advertising and promotional materials to announce your opening. Add to your list business cards, stationery and envelopes, plus enough office supplies to get you started. If you're running a retail store, you'll need enough inventory on hand to sell to your first customers.

How can you estimate these costs? "You'll be very accurate in projecting start-up costs if you speak with vendors, check out catalogs and price lists, and look for actual, as opposed to approximate, prices," says Bangs, who advises adding a cushion to cover unexpected expenses or special purchases.

First month's expenses. In addition to your one-time start-up costs, you'll need enough money to cover your first month's operating expenses. Calculate how much you'll need for rent, maintenance, advertising, transportation charges and office expenses.

Salary. Chances are, your start-up won't immediately generate enough revenue to cover all your business bills plus pay a salary. Therefore, you'll need to add to your start-up costs enough money to cover your personal living expenses. Depending on your circumstances, it could take anywhere from a few months to one or two years before your business will be able to pay you a salary.

"Within eight months after starting my business, I was paying myself the equivalent of what I made at my corporate job, about $4,500 a month," says Mitchell. "I was able to start paying myself a salary because I didn't borrow heavily at the outset and I kept my expenses down." Mitchell's initial start-up costs, she notes, were around $2,000.

To minimize your start-up costs, you can lease or borrow equipment or buy second-hand. "I started out with an old computer I had on hand and bought a used printer. To have my business brochures printed, I traded office services with the owner of a local print shop. I also worked out of my condo to keep my initial costs low," says Mitchell. "It pays to be creative when figuring out how you'll spend your start-up capital."

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