One-time expenses will be relevant mostly in the startup process, such as the expenses for incorporating a company. If there’s a month when you must make a one-time equipment purchase, your money going out will likely be greater than the money coming in, Shinar said. This means your cash flow will be disrupted that month, and you will need to make up for it the following month.
Ongoing costs, by contrast, are paid on a regular basis and include expenses such as utilities. These generally do not fluctuate as much from month to month.
Essential vs. optional costs
Essential costs are expenses that are absolutely necessary for the company’s growth and development. Optional purchases should be made only if the budget allows.“If you have an optional and nonurgent cost, it may be best to wait until you have enough cash reserves for that purchase,” Shinar said.
Fixed vs. variable costs
Fixed expenses, such as rent, are consistent from month to month, whereas variable expenses depend on the direct sale of products or services. This is a reason that comparing the best credit card processing providers is so important, processing rates are a variable cost that you’ll want to regularly review to ensure you’re getting the best deal. Shinar noted that fixed costs may eat up a high percentage of revenue in the early days, but as you scale up, their relative burden becomes negligible.
Most common startup expenses
It’s important to understand the different types of costs you’ll have as a new business. Theoretically, it’s good to take note of what costs are fixed, variable, essential or optional. But let’s get concrete. Here’s a short list of costs you’ll likely have as a new business:
● Web hosting and other website costs
● Rental space for an office
● Office furniture
● Labor
● Basic supplies
● Basic technology
● Insurance, license or permit fees
● Advertising or promotions
● Business plan costs
●
Typical costs for startups
The following table estimates very basic fixed costs for a hypothetical startup company with five employees. Variable costs will depend on each business’s situation and are not included in this table.
4. Project your cash flow.
Another important aspect of a startup’s financial planning is to project the business’s cash flow. Bill Brigham, director of the New York Small Business Development Center in Albany, advises new business owners to project their cash flows for at least the first three months of the business’s life. He said to add up not only fixed costs but also the estimated costs of goods and best- and worst-case revenues.
“If you borrow money, make sure you know not only how much you borrowed but also the interest you owe,” Brigham said. “Calculating these costs puts a floor on the revenues needed to keep the business viable and provides a good picture of the cash necessary to start it up.”
This is an essential step in maintaining your business’s financial health. Without being realistic about your cash flow and debt, you won’t be able to get your business off the ground, especially as other costs begin to build.Gerber recommends starting a business without borrowing at all, if possible. Borrowing puts a lot of pressure on any business and its owners, he said, as it leaves less room for error. Do your best to explore all of your funding options. If borrowing is your only option, work closely with your lender to ensure your business is financially able to handle the commitment. Keep in mind that when it comes to small businesses, personal assets are also often on the line.
Once you get your business going, Shinar recommends using Freshbooks or Quickbooks accounting software, which can connect directly to your bank account to track your expenses throughout each month and during tax season.
5. Figure out your financing methods.
Once you’ve determined your costs and projected your cash flow, you’ll need to consider how to pursue financing. How you obtain funds will affect the future of your business for years to come. Personal savings, loans from family and friends, government and bank loans, and government grants are just a few potential funding sources. Many companies use a combination of different sources.
According to Herndon Davis, mortgage loan officer and real estate agent at Mortgage Real Estate Services, most startups are self-funded. However, there are other options.
“Additional funding can come through establishing business credit and different lines of credit through piggybacking scenarios,” Davis said. “There’s also small business loans and angel investors willing to step in at certain stages. At this point, your startup should show established client/customers, growth since inception, a unique positioning in the marketplace, and a clear business plan on how to grow with the additional funding.”
One place to go for help is SCORE. Formerly known as the Service Corps of Retired Executives, this volunteer organization partners with the SBA and offers training and workshops for small business owners and aspiring entrepreneurs. Most importantly, SCORE offers counseling from people who have been in the business you might want to be in and know the specific issues you’re likely to encounter.
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