Make a Plan for Financing Your Small Business
So, you’ve decide you want to start your own small business. Do you know how much it’s going to cost to join the 30 million small business owners in the United States? If you don’t have a clear idea of what your startup costs are going to be, you may not be part of the 30 million for very long.
Very few entrepreneurs can finance a startup using only their own cash. Most, if not all, small business startups require borrowing capital. But if you don’t know what your startup costs are going to be, how do you know if you’re borrowing enough to start your business off right? Undercapitalization is one of the primary reasons many small businesses fail. Properly calculating your startup costs helps you:
- Estimate profits
- Do a breakeven analysis
- Secure loans
- Attract investors
- Save money with tax deductions.
[Get a leg up when it comes to raising capital and creating small business success at the Greater Des Moines Partnership’s bi-annual Raising Capital Seminar.]
Make a Plan for Your Small Business
The first thing you want to do is put together a list of expenses. There are the typical expenses that come with most businesses, such as office space, equipment and supplies and inventory. Will you have employees? You’ll need to be able to pay them right away. Don’t forget utilities, licenses and permits and business insurance. Be sure to carefully research all the expenses associated with your type of business.
Some expenses will have well-defined costs — permits and licenses tend to have clear, published costs. You might have to estimate other costs that are less certain, like employee salaries. Look online and talk directly to mentors, vendors and service providers to see what similar companies pay for expenses.
Once you’ve identified your business expenses and how much they’ll cost, you should organize your expenses into one-time expenses and monthly expenses.
One-time expenses are the initial costs needed to start the business. Buying major equipment, hiring a logo designer and paying for permits, licenses and fees are generally considered to be one-time expenses. You can typically deduct one-time expenses for tax purposes, which can save you money on the amount of taxes you’ll owe. Make sure to keep track of your expenses and talk to your accountant when it’s time to file your taxes.
Monthly expenses typically include things like salaries, rent and utility bills. You’ll want to count at least one year of monthly expenses but counting five years is ideal.
Add up your one-time and monthly expenses to get a good picture of how much capital you’ll need and when you’ll need it. You’ll want this information in a format that’s clear and easy to understand. Investors and lenders compare expected costs to projected revenue and determine the potential for your business to be successful and, at the end of the day, to repay lenders/investors.
Find more tips on starting and growing your business at sba.gov. Learn more about The Partnership’s Business Resources offerings, including connecting locally, globally, workplace wellness, inclusion and more.
Discover more about The Partnership’s tools to help Greater Des Moines (DSM) entrepreneurs and startups develop and grow their ventures with Small Business Resources.