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."