Entrepreneuship Week 2009: Startup Costs

Many first-time entrepreneurs make the mistake of misjudging the amount of money they’ll need to get their ventures off the ground. This is often a reason many of them end up failing. A rough estimate isn’t enough. You need a detailed map with solid, well-researched numbers.

There are two kinds of startup costs—initial and ongoing, or rather, one-time expenses and those that you’ll be paying over and over again. Make a list of all your initial costs, no matter how significant or insignificant. For example, if you have to purchase a large piece of machinery or equipment, make sure you also take into account the costs involved with transporting it or setting it up. Now make another list with your ongoing costs. What will maintaining your business cost you on a month-by-month basis?

Now that you have a tally for both types of costs, add extra money to each and consider this miscellaneous. Extra unforeseen costs are always going to come up, so be prepared for them.

What you should have now is a total for your initial costs and a total for one month of ongoing costs. Take your one-month total and multiply it by six. It is generally recommended that you have enough cash on reserve to keep your business going for six months. Some might recommend a full year, but make sure you prepare for at least a six-month period.

Many of the expenses that you’ll incur can be difficult to gauge, so you need to do sufficient research. The best way to start is to talk to people who have already started similar businesses. Trade associations can also be a wealth of information. Many have startup packages that can help you in calculating your startup expenses. Suppliers, manufacturers, distributors—they’re all excellent resources for figuring out costs. Call them and tell them that you’re planning to start a business and are looking for costs. Ask about things like bulk-buying discounts, startup inventory packages, credit terms or anything that might lower your cost. You can also always check out websites or libraries for information. The thing that you need to remember is that good research is invaluable. It can tell you whether your business idea is financially feasible and give you a better picture of what your place is in the market.