Making the leap from employee to business owner takes a considerable amount of planning. Beyond determining if you’re ready and willing to strike out on your own—and that your “big idea” for a business is, in fact, viable—there’s the overarching question of how much it will cost you to get up and running.
While the actual numbers will vary considerably, depending on the type of business you have in mind, the importance of getting this calculation right cannot be overstated. Fail to nail it and you’ll find yourself coming up short just when your business is on the verge of turning a critical corner.
In the U.S., the average startup costs for a new business hovers around $30,000, according to the Kansas City, Missouri-based Ewing Marion Kauffman Foundation, which aims to help people attain economic independence by advancing educational achievement and entrepreneurial success.
But that’s just an average. If your big idea is more in line with a micro-business, such as a home-based sole proprietorship or a low-cost franchise, you could potentially be up and running for anywhere from $1,000 to $5,000.
Knowing your correct number will help you figure out your financing requirements, as well as what needs to happen for you to break even. It will also help you manage cash flow once your business becomes operational.
Know Your Numbers
As a general rule, the term “startup cost” refers to how much you’ll need to cover before the business begins generating revenue. And they generally fall into two categories: Expenses and Capital Expenditures.
Expenses are the costs you’ll incur when you’re getting ready to launch. Market research, business cards, letterhead, advertising and the fees paid to your lawyer and accountant are all good examples—and they’re all usually tax-deductible. You may need to ask your accountant about this.
Capital Expenditures are the one-time costs associated with purchasing assets. For example, inventory, vehicles and/or buildings. These costs don’t usually meet the criteria for deductions, but they may be written off through depreciation. Again, ask your accountant for further information.
If, for any reason, you start down the road toward launching a business and then decide not to, none of the expenses incurred along the way will qualify as deductions. As far as the IRS is concerned, these expenses would be classified as non-deductible “personal costs.”
Count Your Assets
To accurately project how much it will cost to start your business, you’ll need to factor in the money you already have available to support your company through its first year in operation.
That’s not to say you’ll need to float the business entirely through its first year—if you launch strongly and pull in customers right away, you may not need to—but you should be financially prepared and willing to fund the business through the startup phase, which may include covering payroll, rent and other expenses until the operation is self-sustaining.
Create a Spreadsheet
Give yourself a little clarity by creating a spreadsheet and listing all of your expenses, capital expenditures and assets. Next, try to come up with ballpark figures for each expense. Doing this will give you a rough idea of where things stand.
Crunch the Numbers
Using your ballpark estimate and this nifty calculator from Entrepreneur.com, you should be able to determine if the startup costs exceed the amount you have available in personal assets. If so, go back to your spreadsheet and slash any unnecessary expenses. If you can’t eliminate, reduce.
For example, do you really need that $2,500 identity package from an established graphic designer, or could you get away with a less expensive option you found online until the money starts coming in? Go down the list and scrutinize every cost—consider these choices your first executive decisions as a prospective new business owner.
If you’re undecided about some of the costs, ask around. Reach out to other small business owners, or join a business networking group so you can get input from those who’ve successfully navigated this process.
Leverage Available Resources
Starting a business is no small undertaking and getting your budget right—especially when you’re just starting out—is essential. Fortunately, there are many resources available to assist entrepreneurs, including SCORE and your local Small Business Development Center. Reach out to them. They know what they’re talking about and they’re happy to help.
Knowing how much you will need to start your business will provide a good sense of both your financing requirements and the amount you will need to generate on a consistent basis in order to achieve your break-even point.
The figures will vary according to the type of business you choose to pursue, and arriving at your specific number will take some planning. But if you follow the tips outlined above and make good use of the resources available, you should be able to make the leap with confidence.