Funding associated with starting a business is also known as capitalization. Capitalization, or the lack of it, is the chief reason that small businesses fail. Really, being undercapitalized in any venture is a warning sign. So how do you know how much money you will need to get going? If you are not familiar with Excel or spreadsheets, now is the time to do so. Basic templates of income statements, cash flow, and balance sheets are all available and easy to use. Expenses can be broken down into two main categories; fixed costs and variable costs. Fixed costs are just that. They are expenses that you will have regardless of any sales you make. Here is a list of common fixed costs:
- Office space
- Equipment and supplies
- Licenses and permits
- Lawyer and accountant
- Employee salaries
- Advertising and marketing
- Market research
- Printed marketing materials
- Making a website
Add to this list anything that is unique to your business. You will notice that items like office space and equipment and supplies will be needed regardless of if you have sales or not.
The second type of expenses is variable costs. As the term denotes, these costs will vary with the number of products you create. This is often referred to as cost of goods sold or COGS. If you think about it, it takes more raw materials, labor, and time to create 100 products, than it does 1 product.
A key statistic that you need to know is something called the break-even point, where your fixed and variable costs, when added together, equal your sales dollars. The chart below gives you a good visual of this:
As we mentioned, fixed costs will be counted first as they are not directly correlated to revenues. Variable costs are added to fixed costs, next in order to give you a total cost at each level of production. Point P in the graph above is the break-even point, where sales equal total cost. Revenue less than Point P will mean you are losing money, and revenue about Point P shows that you are making money. Without this type of analysis, you will have no idea where you stand financially. Many start-ups use a cash flow statement of basic money taken in and money going out. This is okay but will not meet the needs of a growing business.
The Small Business Administration has put together an interactive start-up expenses template that you can easily use and modify. This will help you better estimate the expenses you will have before you get going on sales. Click the button below to take a look:
Once we have a good handle on the cost of starting our business, we can next turn to ways to fund it. In the next part of our series on resources for small business, we will focus on funding, including loans, investors, self-funding and more. Unless you are well capitalized and self-funding, this is a major hurdle that must be jumped to get your business off the grown.