Financial Questions For A Startup

How much will it cost?

One of the questions I get asked when mentoring startup entrepreneurs is “How much money do I need to start my business?” A Shopify survey of 300 small business owners and 150 aspirational entrepreneurs in the U.S. found that they spent, on average, $40,000 in the first year of business. While some businesses still require lots of money to get off the ground, some surveys report that founders used less than $5,000 to start their first company. But every business is unique, and costs will vary depending on the type of business, geographic location, and the business owner’s financial situation. Although many small business owners launch their business on a shoestring budget, sometimes it is advisable to have some capital to fall back on, whether it be $10,000 or $100,000…depending on the size of your business and the industry you choose. While there’s no easy answer for how much money you’ll need, here are some questions you might ask yourself as you develop a startup budget.

  • How long can I afford to live without a salary?
    • If you need a salary immediately: Expect to keep your current job. I did all my business concept analysis and plan development while still employed because I wanted all my savings to go toward the actual startup. Data from a past study found that only 28 percent of the founders who responded said they started paying themselves immediately.
    • Don’t count on a big paycheck. The same survey also found that when the founders started taking a salary, 45 percent said they paid themselves less than $50,000.
    • If you can live for a year without a salary: Congratulations — you’re in better shape than I was. 31 percent of founders responding to a survey said they waited 12 months to start paying themselves…another 18 percent waited two years.
  • What kind of business do I want to start? Am I selling a product or a service? Am I planning an online business or brick & mortar?
    • If you’re selling a product: You may need more money up front for things like: raw materials to build the product; production equipment and space; people to do the work (unless you’re doing it all yourself)…of course, you can beg friends and family to help but eventually you’ll need to pay for some sort of staff, whether it’s full-time employees, part-time workers, or independent contractors. If you’re starting a business that requires full-time employees, remember all employee salaries, benefits and perks.
      • Think about outsourcing work for specific tasks to freelancers, thereby saving employer and payroll costs. You can also save money by hiring an intern. There are a number of online businesses that also provide help with specific tasks like acting as your HR department or managing remote workers.
      • Don’t forget you’ll need time to actually sell and market the product.
      • Startup expenses can include initial legal and state incorporation fees, as well as deductibles like business travel and meals.
    • If you’re selling a service: Your business might be cheaper and easier to launch. At first, you may not have to hire anyone other than yourself; if you work out of your home, you probably can save money on office space; and if you’re already an expert in your field with experience and contacts, you might not need as much timed money to market your services. However, service businesses are more difficult and expensive to scale since they depend on hiring more people.
  • Have I researched other similar businesses?
    • Check the financial statements of any publicly listed business in your industry. Although you won’t have all the average start-up costs they do, this will help you see what they are spending their money on.
  • Where am I planning to start my business?
    • Growing tech hubs including Austin, Salt Lake City, and Raleigh, North Carolina, are attractive to founders, in part because of their high rates of entrepreneurship and their population growth.
    • If you’re located in an expensive, densely populated city like Silicon Valley, it may mean lots of competition for workers and office space. Think about having a virtual office with a remote workforce rather than rent office space until your business is financially able to handle those types of payments or maybe even barter for office space. 
    • Lease agreements may require you to pay a security deposit and multiple months of rent upfront. If you’re planning on buying a space, a down payment on a commercial property typically ranges from 10% to 30%, depending on the lender.
  • How quickly will I need to get the product or service to market?
    • If speed is everything then get that fundraising pitch deck ready. Fundraising is difficult and time-consuming, and most founders have to bootstrap their businesses, at least initially. Even before the pandemic, 3 percent of respondents to the 2018 survey said they used venture capital to start their business; 43 percent said they used savings, and 15 percent said they used credit cards or loans from family and friends. Think about the difference between debt and equity funding. Debt funding may mean higher expenses due to principle and interest payment. Equity finding may mean loss of decision making control.
    • Also, keep in mind that customer acquisition can be expensive.
    • Some founders never take outside investment and still find success. Says Ben Chestnut, co-founder and CEO of Mailchimp: “My mother used to tell me, ‘You are the only person you can depend on to put food in your mouth.’ So, in the early days of Mailchimp, it never occurred to me to borrow money or get funding to grow my business. If I need to make more money, I find a way to serve more customers — just like my mother taught me.”
  • Have I estimated ongoing and one-time costs.
    • Be sure you estimate which costs you’ll pay month-to-month or year-to-year and which will only be one-time start-up costs or payments.
    • A one-time expense can be anything from equipment purchases to paying for a special one-off service, such as a business consultation or legal advice. When you make a one-time purchase, you may find more money flowing out of your business than coming in so plan these costs accordingly because one-time expenses might be optional costs that are made if the budget permits it. While identifying these costs, decide whether they are essential or optional. A realistic start-up budget should only include those things that are necessary to start a business.
    • Ongoing costs should not alter your monthly cash flow since they are included on a regular basis in your overall budget. Be sure to recognize that ongoing costs can be fixed (paid regardless of how much you sell like rent, utilities, insurance, taxes or debt repayment) or variable costs which are based on sales volume (as profits increase so do variable costs like raw materials, inventory, shipping, and sales commissions).
    • Don’t underestimate expenses. According to the U.S. Small Business Administration, most micro businesses cost around $3,000 to start, while most home-based franchises cost $2,000 to $5,000.
    • Many experts recommend adding 10% to your business cost to account for unforeseen or miscellaneous expenses.

It doesn’t matter how you choose to begin your business; you need to plan ahead and allocate costs. Stick to a predetermined business budget. It doesn’t take long to overspend if you don’t know where the money goes. SCORE has a great tool that will help start-up business owners use projections to create a budget to start.

For more thoughts on budgeting, read How To Start A Budget. You might also read the blog entitled Business Financial Planning.

Copyright ©John Trenary 2022

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