Do you ever dream of opening your business? Creating an original product or offering your talents and services? And brainstorming on how you would market it to the public or your target audience? If yes, you should know how much money it would cost to open up a business establishment.
There is no definite answer on how much money is required to start up a business because every venture is different and unique on its own. Nevertheless, there are multiple factors that you need to consider so you can estimate the average amount needed for starting a business. The following will help you in calculating the startup cost of your business.
Set-Up a Business Plan
The first step to making your dream business come true is to set up a business plan. A business plan is an important and detailed document that explains your business’s objectives and goals and how you would achieve them. It also helps you determine whether your business idea is viable and profitable or if they’re not.
Aside from your objectives, the business plan should include your products and services, an executive summary, financial planning, the marketing strategy and analysis, and most importantly, your budget. Having a business plan at the earliest time possible allows you to identify the various aspects you need to spend money on.
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There are multiple purposes of creating a business plan, including:
- Attracting potential investors.
- Creating a valuable strategy for your business’ growth.
- Determining your current financial standpoint and future needs.
The business plan will primarily help you keep track of your business milestones and success, or its lack thereof.
Identify Your Expenses
When creating a written roadmap, aka the business plan, for your business, figure out each of the things you would spend money on. However, in order to do that, you need to establish first wherein the three (3) business categories your business falls into.
There are three (3) types of business, and they are (1) brick and mortar business, (2) an online business, and (3) service providers. Each category provides different benefits and advantages, and choosing the right business type is crucial to your business’s success.
- Brick and Mortar. The brick and mortar refer to the traditional business where the products are services are offered and purchased in person. This type of business offers face-to-face interaction with the customers through their physical store, which is either rented or owned. Some examples of brick and mortar businesses are banks, restaurants, and grocery stores.
- Online. An online business, also known as electronic commerce (e-commerce or eCommerce), allows both individuals and businesses to sell or purchase a product over the internet. Going online makes shopping more convenient and lets a business reach a wider set of users.
- Service Business. A service provider business is where the business offers personal labor or expertise as a product. A service business commonly comprises multiple professionals and experts who complete a certain task beneficial for the customer. An example of this is airlines, real estate agents, law firms, and many more.
Depending on your business type, you will encounter different startup expenses. A physical store is a must in brick and mortar business but not online. You will need to pay for hosting services for your online shop, but that is not required for a service business. There are numerous expenses common to startups, but there are also expenses unique to a certain business type.
Types of Expenses
Understanding the multiple types of expenses will help you in identifying all of them. You can group your expenses based on their type, and then you can easily track and review them, so you’re not missing anything out. Knowing the difference between the various types of expenses will help you properly manage the business’ cash flow for the future.
- One-time vs. Ongoing. These types of expenses are easy to understand. One-time expenses are purchases that will only happen once, such as procuring office equipment and getting licenses and permits. Ongoing expenses need to be paid regularly, such as rent, utilities, and employee salaries.
- Essential vs. Optional. The essential cost is expenses that are utterly vital for your business’ growth, development, and success. Optional costs are purchases that are only made if you have an extra budget to afford them.
- Fixed vs. Variable. Fixed expenses that are consistent payments monthly or quarterly, such as rent and insurance. Variable costs are expenses that are dependent on the product output and sale. Examples of variable expenses are commissions, labor, and utility cost.
When identifying your overall expenses, be as detailed as possible and include everything starting that you can think of.
Calculate the Estimated Startup Cost
After completely identifying all of your expenses, you can now start crunching the numbers. However, organize first your expenses in one-time expenses or monthly expenses, and then you can write down how much each expense cost.
The total of your one-time cost is the initial amount needed to start your business. One-time expenses commonly have defined costs which is why they are easier to compute. However, that is not the case for most of the monthly expenses. Monthly expenses do not generally come in fixed amounts such as salaries and utilities.
In this situation, you can talk to your mentors, advisors, and other similar businesses to help you develop a realistic estimate of each expense. After estimating, the monthly cost must be calculated to at least one (1) year up to five (5) years.
The total of your one-time cost and the monthly cost is your estimated capital. It is the answer to how much money you would need to start your own business. If you are worried about where you can get your needed capital, you can always pitch your business idea to potential investors or apply for the right loan. By having a thorough and convincing business plan, you can ensure that the loan’s approval steps will be smooth.
Having your own business is an exciting process that requires an enormous amount of dedication, perseverance, sacrifices, and especially money. For everyone starting their first business, it is advisable to start small, maintain an open mind, plan out for any issues that may come up later, and most importantly, you have to be realistic in determining your startup cost.