Start up Business Series: Start up Costs
Over 500,000 new business start each year. One third fail within the first year and more than half within 2 years. The biggest reason is cash, or lack of. In most cases, this will be because of poor planning from the start. Cash is the oxygen of a small business and you cannot afford to not get it right - from the start. Most businesses that fail due to lack of cash, is because of poor planning within the startup phase.
Here, we’re discussing the minimum amount needed to get the business off the ground. We’ll cover the first year and onwards later in this guide.
Keep it lean, keep it mean
It’s all too easy to get over excited when you start your own businesses; I did. You’re going to be making the mega bucks in no time so why not splash out? Because you’ll fail.
Don’t go over the top, and keep costs down as much as possible. There will be some items you need to buy which are unavoidable, some that are totally avoidable.
For instance, if you’re starting a service based business, start from home until you’re generating enough income to cover an office, or shared working space. Don’t feel you need a nice flashy office to impress. You wouldn’t move into a home which is 4 times your salary. Don’t do the same here. You’ve probably got enough to pay for in terms of software, computers etc that you can’t do without. Absolute essentials only. The fun stuff can come later.
You stand a much better chance of making a profit - or even just surviving the crucial first year by keeping costs to a minimum as no matter how much planning or marketing you do, you just don’t know how many sales you’re going to make in the first year.
Avoid funding if you can
Especially traditional forms of funding. They can strangle a small business to death, I’ve seen it happen too many times, especially businesses that require premises or equipment.
It’s easy to get it leased, and then hope your sales make up enough to pay for the monthly repayments. It’s much too bigger risk.
Within the first couple of years, your small business may well require a cash injection. If you’ve spunked thousands of other people's money at the beginning, they’re not likely to invest if you ask again.
If you do need funding, make sure you get a bit more than you need. If you don’t need it, you can pay back early and be on great terms. It’s much better than losing face and needing to ask for more later.
Fake it ‘till you make it
Theo Paphitis apparently started his business in a broom cupboard of a shared office space. He called it ‘The Windsor Suite’ and made sure he held meetings elsewhere or went for a coffee.
This gave the impression he had a flashy big office, when in fact he didn’t. Employ as many tricks like this as you can until your cash flow is there.
Include higher expenses and spread costs
Increase the amount of startup costs you calculate, this will give you wiggle room for mistakes/price increases and unforeseen costs you didn’t think of (which will happen). Make sure you include a decent contingency too for any disasters.
Wherever possible, agree deals with or chose suppliers where you pay monthly, or use subscriptions rather than big chunks of cash up front. For example, don’t pay for a website upfront, use a cheaper subscription with no tie-ins, that can spread the cost over time.
What to do now?
Use our template for start up costs (or create your own) which is on our website here.
Don’t forget, look out for our next blog in the series: Suppliers
If you missed our previous blog in the series, Competitors, take a look here.
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