What does it cost to open a new business

and, to keep it open

Many small busi­nesses fail each year. Some experts quote research show­ing nine of ten start ups will be gone within the first 2 years. Oth­ers say five out of ten new busi­nesses fail within the first 5 years. Let’s just say the fig­ure is large and you do not want to add to the sum.

Here, we’ll look at how to pre­vent a main rea­son for fail­ure: Inad­e­quate or faulty finan­cial pro­jec­tions and inad­e­quate funds (or per­sonal sav­ings) to cover all the busi­ness expenses until the busi­ness begins to gen­er­ate a pos­i­tive cash flow.

To avoid this, you need to know how much money you have, how much can you’ll need for start-​up costs and how much money it will take to stay in busi­ness.
When fig­ur­ing how much money you have, it’s gen­er­ally wise to include any busi­ness and/​or life part­ners in the dis­cus­sion. Mis­un­der­stand­ing at this step of the process can pop up later as stum­bling blocks.

To esti­mate start-​up costs for a typ­i­cal retail busi­ness the list below can suf­fice; for ser­vices, con­struc­tion or man­u­fac­tur­ing firms, add or remove the items to suit your situation.

Esti­mate Start-​up Costs:

_​_​_​_​_​_​_​_​_​_​_​Dec­o­rat­ing, remod­el­ing
_​_​_​_​_​_​_​_​_​_​_​Fix­tures, equip­ment & instal­lion
_​_​_​_​_​_​_​_​_​_​_​Sig­nage
_​_​_​_​_​_​_​_​_​_​_​Legal & pro­fes­sional fees
_​_​_​_​_​_​_​_​_​_​_​Insur­ance
_​_​_​_​_​_​_​_​_​_​_​Ser­vices & sup­plies
_​_​_​_​_​_​_​_​_​_​_​Licenses & per­mits
_​_​_​_​_​_​_​_​_​_​_​Rent, util­ity & tele­phone deposits
_​_​_​_​_​_​_​_​_​_​_​Ini­tial inven­tory cost
_​_​_​_​_​_​_​_​_​_​_​Adver­tis­ing, logo design, busi­ness sta­tionery print­ing
_​_​_​_​_​_​_​_​_​_​_​Web­site /​Inter­net mar­ket­ing
_​_​_​_​_​_​_​_​_​_​_​Unex­pected expenses (fig­ure 10 – 30%)
_​_​_​_​_​_​_​_​_​_​_​Total for start-​up

For this exer­cise do not project any income to off-​set your expenses. The aim here is to have enough cash on hand to cover at least the cost of your first three months of oper­a­tion. You will need it.

Monthly Oper­at­ing Expenses:

_​_​_​_​_​_​_​_​_​_​_​Your liv­ing costs (See how to set prices)
_​_​_​_​_​_​_​_​_​_​_​Employee wages, train­ing, ben­e­fits, Work­ers’ Comp
_​_​_​_​_​_​_​_​_​_​_​Rent, util­i­ties & tele­phone monthly costs
_​_​_​_​_​_​_​_​_​_​_​On-​going adver­tis­ing, print­ing, web­site host­ing
_​_​_​_​_​_​_​_​_​_​_​Sup­plies, postage
_​_​_​_​_​_​_​_​_​_​_​New inven­tory
_​_​_​_​_​_​_​_​_​_​_​Insur­ance
_​_​_​_​_​_​_​_​_​_​_​Taxes
_​_​_​_​_​_​_​_​_​_​_​Main­te­nance
_​_​_​_​_​_​_​_​_​_​_​Delivery/​transportation/​shipping
_​_​_​_​_​_​_​_​_​_​_​Mis­cel­la­neous
_​_​_​_​_​_​_​_​_​_​_​Subto­tal for 1 month
_​_​_​_​_​_​_​_​_​_​_​Total 3 month oper­at­ing expenses (mul­ti­ply 1 month x 3)

To esti­mate the money to deposit into your busi­ness savings/​checking account, add “Total start-​up” to “Total 3 month oper­at­ing expenses”.

Use the money you deposit for items you listed above only! This money is your life­line to keep afloat and to stay in busi­ness dur­ing these first crit­i­cal months.

If you sub­tract the totals from your cash (sav­ings) avail­able you see how much addi­tional financ­ing you may need.

Now that you have the hang of it, esti­mate your first year oper­at­ing expenses. From there, deter­mine your annual expenses and esti­mate your sales vol­ume month-​by-​month. To fine tune your pro­jec­tions, take your sea­sonal busi­ness trends into consideration.

For this to work, you need to con­tinue with this process after the first 3 months, after the first year, and ever after so that you always have reserves to even out the rough places, and keep yours out of the statistician’s heap of failed businesses.

Tips:

Get infor­ma­tion on sea­sonal sales pat­terns and typ­i­cal oper­at­ing ratios from trade asso­ci­a­tions for your business.

Your busi­ness idea may be a real grab­ber, but if you can’t raise the 3 month min­i­mum through sav­ings and investors, con­sider how likely it is that you will lose what sav­ings you do have. It may be wis­est to add more to your sav­ings before proceeding.

Sketch­Pad is glad to sup­ply firm esti­mates for your adver­tis­ing, mar­ket­ing or web­site projects.