What does it cost to open a new business

by Norma

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.

opening-business-costsHere, 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.

{ 1 comment… read it below or add one }

AMANDA September 7, 2012 at 11:02 am

Thank you! The information provided was very helpful to me. I am planning on starting a small business soon & was unsure how to calculate the start up costs. This info was very detailed & organized in a way we can all understand!

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