12 Ways to Determine Costs for Your Startup

If you’re starting a company of your own, what methods would you use to define how much your initial investment should be?

You need to have an accurate estimate of start-up costs in order to reasonably predict your financial performance in the first few quarters. The cost requirements are different for different industries. Use these tips to start the number crunching for your business and come up with an accurate estimation for your start up investment.

1. Know How Much Capital Will Be Enough

How much capital will be enough? To know this, determine how much capital you need for one year of business operation. In the first year, keep your initial capital separate from your income. The income of your first year should become the capital of your second year of business. When you do this, the only amounts that you will need to finance are your initial capital and possible growths you want to introduce above and beyond the initial model. Start with this simple model and you won’t go wrong while determining your startup costs.

2. Make A List Of Cost Centers

The first step is to list out all your cost centers. Include things such as professional fees and payments, technology costs, administrative costs, sales and marketing costs and wages and benefits for employees in your cost center list.

Some of the costs you should include in this list are equipment, space, marketing, networking, wardrobe, transportation, business registration and filing, security taxes and so on. Plan for these costs when you’re calculating your initial cash flow requirements, so that you’re not surprised by sudden unplanned costs along the way.

3. Create A Startup Checklist

Create a startup checklist to better gauge how much you’ll need, as follows:

• Decide on a business name and register it
• Create detailed business and marketing plans
• Set up your banking and professional relationships
• Hire a corporate attorney, tax consultant and an accountant
• Obtain permits and licenses
• Set up pricing catalogues for your offerings
• Determine financial requirements and means of obtaining them
• Retain office space and equipment
• Outline risk management and insurance policies
• Hire suitable employees

4. Use Online Startup Calculators To Evaluate Costs

Use one of the many calculators online and calculate your startup costs based on your requirements. These calculators allow you to estimate the costs against each expense category and tell you how much asset you need to have in the bank before you break-even. Here are a few online startup business calculators:

• http://www.businessknowhow.com/startup/startup.htm
• http://www.bplans.com/business_calculators/starting_costs_calculator

5. Predict Business Costs By Networking

Check out other entrepreneurs in your business domain and learn to predict your business’s costs. For example, if you’re opening a cyber café, scan the financial statement of similar companies that have been publicly traded. Even though your revenue numbers will look different, you can get an idea of cost of sales and administrative expenses.
Study trade associations, small business message boards and entrepreneur support groups in related fields to evaluate information for both new and established companies. You could examine statistics or even subscribe to entrepreneur support group magazines, and join entrepreneur forums online to share ideas. Seek out other entrepreneurs who have set up similar businesses, and discuss start-up costs with them, paying special attention to unexpected costs.

6. Project Startup Costs Conservatively

When you calculate start-up costs, you need to allocate a few months of funding to cover expenses before you open for business. Again, once you’re open for business, it takes a little time to get your business to sustain itself. Project your costs conservatively by including a substantial cushion for beginning operations. This will ensure that you will have enough funds to set up an office, hire employees, take orders and cover other related costs.

Be realistic when assuming incoming revenue in the early stages.

Be conservative with cost projections, and see if you can obtain a loan that defers payments during the initial operating period.

7. Distinguish Between One-time And Recurring Costs

Separate one time startup set up costs such as office furniture and fees and recurring costs such as salaries and rent. Establish a budget for the post start-up period using these statistics. Check for every opportunity where you can delay non-vital expenses such as office decorations, until you start seeing revenue.

8. Leverage Tax Advantages

You can deduct an amount of $5,000 during start-up and $5,000 in organizational costs for the first year of your business. However, these rules differ if your costs exceed $50,000 in the first year. You can amortize expenses that are not tax deducted over a 180-month period, beginning after business opens.

Additionally, you can get a tax write off on funds spent on advertising, market research, business-related travel, employee training, legal advising and other costs. You might need to hire a tax professional to advice you, but if you efficiently leverage tax advantages, you can save a great deal of your startup costs.

9. Evaluate Your Cash Flow Needs

While determining startup costs, you need to look a little further down the road and determine the point at which you break even, your cash flow requirements and funding options. These considerations will help you round off your startup costs determinations nicely.

Evaluate the following:

• Funds needed to pay bills till the cash flow starts
• Financial support to survive till cash flow starts
• Continuing outlays for equipment, salaries and inventory
• How many offerings do you need to sell before you break even?

10. Evaluate Funding Options, Sources And Risks

These are some of the questions you need to ask yourself while evaluating funding options. These questions will help you accurately estimate your startup costs.

• What are your funding options?
• How much will come from your savings and investments and how much from borrowing?
• Are you the sole proprietor or will you have partners?
• If you have partners then what will be the division of partner investment?
• Would you solicit external investors for your business?

11. Create A Fund Matrix

To accurately estimate your startup costs, it’s good to come up with a funding matrix so you’ll know how much you need and where you’re going to get it from.

Based on the results of a recent study on the fund sourcing choices of several US entrepreneurs, it was found that different entrepreneurs sourced funds from different sources.

Common Funding Sources:

• 72% of entrepreneurs used personal savings
• 45% of entrepreneurs obtained bank loans
• 28% of entrepreneurs approached friends and relatives to invest in their business
• 10% of entrepreneurs approached third party investors
• 7% of entrepreneurs sourced funds from Government sponsored or guaranteed business loans
• 1% of entrepreneurs approached venture capital Firms

12. Evaluate Returns And Risks Down The Line

When you use personal funds, you don’t have to risk anything other than your savings, unless your home equity is tied to your personal funds. When you approach banks for loans, you might find that banks cooperate better when you’ve risked some of your own personal funds. However, in the long run, most businesses will need external funding of some type.
Note that each funding option needs to be evaluated carefully before you opt for it. In the case of venture capitalists, the returns could take the form of dividends, profit sharing and possibly shareholding within the company.

When you borrow from banks, depending on the size of your loan and the scope of your bank, the return conditions and share holding in your business might vary. Evaluate your long-term plans. Know whether your projected plans will allow you to make the cash returns that some sources demand. This is very important for you to determine startup costs.
Evaluate the risks associated with each funding source type and weigh your options.

Ask yourself the following questions:

• Would you be willing to risk all your savings and your home equity to finance your business?
• Have you thought about low-return low-risk government sponsored and guaranteed loans for small businesses?
• Can you obtain a university or government grant for your business, depending on its nature?

Knowing these answers will help you decide your costs and also the scope of your business. Evaluating all your options will help you secure the funds you need and set up a target startup date.

About the Author: Marina Chernyak is co-owner of startup 1001Shops, a purveyor of specialty products like corner etageres, vanity mirrors from all across the world.

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