How Much Money Do You Need?
Think you're ready to start your new business? Not so fast. Before you take off, you need to know how much money it will cost to get started.
You may have a ballpark estimate, but that's not detailed enough to create a viable business plan and actually get your business off the ground. Accurately gauging how much capital you need is crucial to success. Underestimate your needs, and you'll run out of money before the business becomes profitable. Overestimate your costs, and you'll never raise enough money to get your business off the ground.
Whether your start-up costs total $5,000 or $500,000, you'll need solid numbers. The challenge is finding information that's credible and reliable. The good news: You can get hard data, plus valuable insight, from a variety of sources. Here are eight places to explore:
1. People in the business. Entrepreneurs who own a business similar to the one you intend to start are a superb resource for start-up cost information, says Stephen Bates, owner of Management Analysis Group, a small-business consulting firm in Seattle. Your future competitors probably won't want to assist you, of course, but entrepreneurs outside your geographic area are often more than willing to help.
2. Sources of supplies. Suppliers are another excellent resource for researching start-up costs. "Get on the phone and tell the person you're looking for costs in a particular area because you're planning to start a business. Usually, they're very forthcoming because they're looking for business [from you] themselves," says Kathleen Allen, professor in the Greif Entrepreneurship Center at the University of Southern California in Los Angeles.
However, Allen warns against relying too heavily on the first few suppliers you contact. "Do some comparison shopping," she advises. "That can make a significant difference in your start-up costs." Ask suppliers about equipment leasing, bulk-buying discounts, credit terms, start-up inventory packages and other options that might lower your upfront costs.
3. Trade associations. Like business owners and suppliers, trade associations are "an excellent source because you're dealing directly with [your] particular market niche," says Allen. Depending on the industry, trade associations might give you sample start-up cost worksheets and financial statements, names of established business owners and suppliers in the industry, market research data and other useful information. Suppliers' associations are good resources, too.
4. SCORE. The Service Corps of Retired Executives (SCORE), sponsored by the SBA, is a valuable resource for start-ups. In addition to publications on starting a business, SCORE can pair you with an experienced retired business owner who can guide you through the entire process of launching your company. Yes, you have to do the legwork yourself, but your volunteer counselor can point you in the right direction and suggest resources you may have overlooked.
Besides in-person counseling, SCORE offers a handy Internet-based service that gives users access to more than 12,400 participating counselors nationwide. "If you want a counselor who has experience running a sales office, starting a restaurant, buying a franchise or whatever, put in your specifications and get a list of counselors with those qualifications," says Fred Thomas, former president of SCORE and a SCORE counselor in Thetford Center, Vermont. Visit SCORE's Web site (http://www.score.org), which offers access to experts and links to other sites pre-screened by SCORE.
5. Business start-up guides. How-to start-up guides are available from several independent publishing companies and some trade associations. These guides can be good resources for researching start-up costs, especially in well-established industries. Make sure the guide isn't outdated, and keep in mind that some costs vary widely throughout the country. As you read, be on the lookout for tips that can help you lower your start-up costs.
6. Franchise organizations. If you're thinking about buying a franchise, the franchisor will give you lots of data about start-up costs. Don't view these numbers as absolutes, however, because costs can vary depending on your location. "Test the conclusions the franchisor [gives you] by crunching the numbers on your own," suggests Bates. Call existing franchisees and ask them how closely the franchisor's projections matched their actual start-up expenditures.
7. Business start-up articles. Newspaper and magazine articles rarely give item-by-item start-up-cost estimates for a particular business in a specific geographic area. Nonetheless, these write-ups can offer ballpark estimates of overall start-up costs and help you come up with itemized lists of the costs you'll need to research. Always use credible sources. Don't forget to check trade magazines for information about suppliers, costs and trends in your industry.
8. Business consultants. A well-qualified business consultant can offer excellent advice about start-up costs--and even do a lot of the research for you. A consultant can also help you organize your own research into useful financial projections and scenarios.
The downside to hiring an expert is the cost. If you do decide to work with a consultant, find someone who's familiar with your industry and has experience with start-ups as well as established companies.
A single source won't be able to reveal all the facts you need to figure out the exact cost of starting your new venture. But a determined effort to research these costs will turn up the numbers you're seeking. Allen suggests using a process she calls "triangulation," which involves getting three points of view for each number. "You weigh the value of those [three] numbers and come up with a number you think is correct."
Good research can tell you whether your business idea is financially viable and suggest ways to boost your chances of success. Once you've investigated the start-up costs and developed a sound business plan based on those numbers, you'll be ready for anything.
Marcie Geffner, a freelance writer in Los Angeles, writes frequently on business and real estate issues, appearing in several newspapers and journals nationwide.
Don't Blow It
Be wary of common mistakes:
- Don't neglect your homework. "[Start-up entrepreneurs] don't do their research--that's the most common error. They don't find out what it'll cost to run the business. They leap in without looking."--Kathleen Allen, professor, University of Southern California in Los Angeles
- Don't skimp on cash. "You don't often start out with the kind of sales volume you're hoping for, so you have a period when you're losing money. You have to scope out ahead of time how much money it's going to take to carry you through that valley." --Fred Thomas, former president of SCORE
- Don't overlook growth potential. "Most successful start-ups are surprised to find out it takes more than they're making to expand. If the business is in, say, retailing, they have to build larger inventories and may have more accounts receivable. Those things increase your need for working capital." --Thomas
- Don't woo the wrong bank. "[Start-ups usually don't] understand where a bank is coming from, misjudge it's objectives or go to the wrong one. Businesses might do well to get $200,000 the first year. Large banks don't want that kind of business." --Steve Bates, owner, Management Analysis Group in Seattle
Management Analysis Group, (206) 624-4114, http://www.solutions4mgmt.com