When you’re launching a business or starting out as the newowner of an existing business, proper planning and research areabsolutely necessary. Undercapitalization can be a major problem,one that may lead you right out of business.
You don’t necessarily need piles of money to start a business.Apple Computer was started in a garage by Steve Wozniak and StevenJobs. UPS (United Parcel Service) was started in 1907 when founderJim Casey borrowed $100 from a friend. Yahoo! was founded by a pairof Stanford University graduate students, Jerry Yang and DavidFilo, to help their fellow students locate cool Web sites. There’snothing wrong with this approach if you’re willing to invest agreat amount of time and energy into making the business work. Butkeep in mind that undercapitalization is the number-one killer ofstart-up businesses. Don’t skimp on getting enough money to startyour business right.
To determine how much you’ll need for start-up, account for allopening expenses along with your initial operating expenses.Although different businesses have different costs associated withthem, the main start-up costs include these:
Rent. Under many lease agreements, you’ll be expected toprovide the first month’s rent plus a security deposit. Manyleasors also require the last month’s rent.
Phone and utilities. Some telephone and utility companiesrequire deposits, while others do not. A deposit may not berequired if you own real estate or have a previously establishedpayment record with the company. Telephone deposits are determinedby the number of phones and the type of service required. Unlessyou need a large number of phones and lines, the deposit is likelyto range from $50 to $200. Deposits for gas and electricity (whenrequired) will vary according to your projected usage, so getaccurate information and carefully project your numbers.
Equipment. Equipment costs vary from one business toanother. At a minimum, most businesses need office equipment,signage, and security systems. To determine your costs, list allthe equipment you must have to efficiently operate your business.Next, price those items by obtaining quotes or bids from at leastthree vendors. Use the quotes you receive to estimate your start-upequipment costs.
Fixtures. This broad category includes partitions,paneling, signage, storage cabinets, lighting, checkout counters,and all shelves, table stands, wall systems, showcases, and relatedhardware for product display. The cost of fixtures depends on yourbusiness location, the size and condition of your facility, thetype of business you’re in, what kind of image you want it toproject, and whether you’re purchasing new or used fixtures.
Inventory. Like equipment, inventory requirements varyfrom business to business. Some businesses, such as retail stores,are inventory-intensive, whereas others, such as personal shoppingservices, don’t require any inventory at all except officesupplies.
Leasehold improvements. These nonremovable installations,either original or the result of remodeling, include carpeting andother floorings, insulation, electrical wiring and plumbing,bathrooms, lighting, wall partitions, windows, ceiling tiles,sprinkler systems, security systems, some elements of interiordesign, and sometimes heating and/or air-conditioning systems.Because the cost of improvements can vary tremendously, get severalestimates from reputable contractors.
Licenses and tax deposits. Most cities and countiesrequire business operators to obtain various licenses or permits toshow compliance with local regulations. Licensing costs vary frombusiness to business, depending on the requirements of yourparticular location. In addition to these fees, you’ll also needstart-up capital for tax deposits if yours is a retail business.Many states require a deposit against future taxes to becollected.
Marketing budgets. Most companies determine their firstyear’s advertising budget as a percentage of projected gross sales,typically two to five percent.
Professional services. Before you officially open yourbusiness, get help from a knowledgeable lawyer and accountant whowork with small business owners to make sure you meet your legaland tax obligations. Their fees will range according to theirexpertise, and the location and size of their practices.
Preopening payroll. If your business is going to be afull-time venture, then set aside a salary for yourself in additionto a three-month reserve, just to play it safe. This rule of thumbalso applies to any employees you might hire during this phase ofbusiness start-up.
Insurance. Plan on allocating the first two quarters’cost of insurance to get your business rolling.
A word of caution when estimating these costs: If there’s ever atime to be conservative, it’s now. Err on the high side when youproject expenses, and on the low side when you project revenue. Anddon’t forget to add a “rainy day” or contingency fund to cover thecosts of unforeseen expenses–somewhere around five percent of yourbudget is a typical amount to set aside. This financial cushionwill help you–and your investors–avoid panic in case you’re facedwith an expense you hadn’t budgeted for.
