How to Estimate Startup Costs
By Tim Berry
One of the reasons having a business plan is a good first step for starting a business is to answer the fundamental, and critical question of how much money it will take to get the venture started. I’ve had two good friends who, with different businesses in different years, started strong but failed because they ran out of resources.
In the first case, additional funding might have been available had my friend planned better and applied for a larger loan. But when things went bad, his credit suffered and he wasn’t able to ask the bank for more money. In the case of my second friend, she probably would have planned to use fewer resources and ramped up more successfully if she had a more detailed estimate of her startup costs.
The point is, having an educated idea about startup costs can benefit your business more than not having a plan at all, and facing more unforeseen surprises. The key is to look at your business expenses as individual components.
You can calculate starting costs by making three simple lists, a few educated guesses and then adding them all up.
List spending on assets. Your business assets are the things you need to use in your business over the long term. For example, if you’re starting a brick-and-mortar store, that might include items such as shelves, tables, a cash register and so on. A graphic artist might need specialized printers and a drafting board, among other things.
If you’re either making or selling products, think about the inventory you’ll need to have at the start. The easiest example is the books a bookstore needs to stock its shelves or the raw materials a manufacturer might need to start assembling a product. If you’re starting a service business — meaning you don’t make or sell products — then don’t worry about inventory. You can skip this step.
All of these items make up your starting assets. While you might also think the money you have in the bank is an asset to list here, we’re going to save that for another list later on. Read More