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Estimate your Business Start Up Costs

Entrepreneurs usually underestimate how much money it will take to start a business. The result is usually that the owner ends up in a cash flow pinch, and that's a tough time to have to go out and find financing.  It's important to anticipate how much money the business will need, and do some contingency planning around where you will be able to get it. To determine how much money one will need in order to start his business, putting together a business plan would be highly recommended. The research put into the planning will show the startup costs and monthly operating expenses involved in running the business.  It will also help in predicting approximately how long will it take for the business to reach the break-even point.

The operating expenses are what one needs to meet until the business reaches break-even point. Monthly expenses include rent, phone, wages, utilities, taxes, advertising, inventory, insurance and anything else to operate the business on a daily basis.

An effective financial management system for small business has five parts:

  1. Estimating costs and living by a budget
  2. Making frequent projections of profit and cash
  3. Developing a reliable collection technique and expense control program
  4. Maintaining a dependable accounting system
  5. Managing tax.

Many people have good ideas to handle the business money but only a few demonstrate the discipline in handling the business money. While many feel that the lack of money is the main reason for a business to fail, it is primarily a lack of control of money that drives them to this conclusion.

Hence it is necessary for the entrepreneur to be realistic and understand that the business is unlikely to make a profit within the first six months - so he should also budget for his first six months running costs.

So accordingly he needs to analyze the finance:

  1. Purchase of lease/franchise/premises. This will include any Realtor fees, deposits and other legal expenses.
  2. Stock and supplies - to keep the business going for six months.
  3. Six months’ worth of advertising and marketing. This will be particularly high at the start as the business gets established.
  4. Equipment Maintenance cost for six months
  5. Cost of purchase of new equipment. This will include any work that needs to be done on the premises as well as any equipment that needs to be bought in order to start and run the business. Often the equipment can be leased in order to mitigate high startup costs.
  6. Staff costs for six months. This includes cost to find, train and retain them
  7. Legal, licensing and banking costs.
  8. Uniforms, office and marketing supplies, packaging etc.
  9. Cost for designing logo for the business, brochures and advertising material
  10. Lastly the entrepreneur should take into account his own salary. As he will need to pay his own bills and maintain his family during this time. Being the owner of the business hey may have to take a hit on the standard of living till the business reaches break-even.
  11. A 10% contingency should be included to the sum of the above amount.

This above points taken into consideration is a good starting point to estimate the cost to start a new business.

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