One critical element of creating an actionable business plan is a thorough analysis of your projected startup costs and revenue. Establishing a business that can withstand the test of time is no easy task. The vast majority of entrepreneurs fail due to their inability to begin and maintain growth. An understanding of the initial investment requirements for your business plan will set you up for success. Furthermore, it will allow you to earn the trust of potential investors.
To effectively estimate the investment capital required for your business venture to flourish, you will need to calculate your projected startup costs, determine which expenses are most relevant to your needs, project your cash flow, and decide which financing options are best for your business. Read on to learn more about how you can get your startup off the ground.
Estimate Your Startup Costs
Most entrepreneurs begin with high hopes for their business, but an overly ambitious goal causes many business owners to invest too much capital at an early stage. It’s in your best interest to start with the smallest amount of money that is realistic and prepare for unexpected hurdles to arrive. As you craft your business plan, consider inexpensive ways that you can test your ideas. Not only will this allow you to begin building trust with your audience, testing your business concept will enable you to discern whether or not consumers are interested in your product.
The amount of investment capital needed to begin building your business is entirely dependent on your concept. As stated by the Small Business Administration, a micro-business may get started for as little as $3,000. In contrast, businesses like restaurants, medical offices, and manufacturing companies may cost over $100,000 to begin. Ensure you are spending prudently while maintaining a buffer of emergency resources, so you don’t find yourself sliding quickly into dangerous financial territory.
Know Which Costs Are Relevant to Your Startup
There are many different expenses to account for when you’re in the process of getting your business off of the ground. Aspiring entrepreneurs must understand various startup costs so that they can estimate, sustain, and manage cash flow effectively.
One-Time Costs vs. Ongoing Costs
In the beginning stages of development, ensure that you understand the one-time expenses needed to begin operations. One-time costs typically include equipment, permits and licenses, signage, furniture, and incorporation fees. When one-time purchases are required, remember that this will disrupt your monthly cash flow. Your expenses will likely exceed your revenue during the month that one-time purchases are made.
In addition to one-time costs, there are ongoing costs. These are expenses that you must account for every month. Depending on your business model, ongoing costs may include the following:
- Employee payroll and benefits
- Business insurance
- Rent
- Office supplies and other inventory
- Utilities, including phone, water, gas, and internet
- Marketing, accounting, and legal services
- Website hosting and maintenance
Fixed vs. Variable Costs
In the simplest terms, fixed costs are those that remain the same each month. Variable costs like payroll, inventory, shipping, and packaging change from month to month. You may need to review them each month to ensure that you are paying the lowest amount possible for variable expenses. In the beginning stages of your business, fixed costs will comprise a high percentage of your total revenue. However, as your company expands, variable costs will likely require more of your attention.
Estimate Your Cash Flow
Once you have established the overall costs of your startup and operations, it is time to project your business’s cash flow. It is advisable to project your cash flow for the first three months of business. Be conservative with your estimates. Consider the one-time costs and fixed costs, along with the high and low values for your projected revenue.
Although it is encouraged to have big goals, remember to remain realistic. The main reason that most businesses fail is that they bleed themselves dry of capital in their first five years of operating. An accurate picture of your business’s financial situation will increase your odds of success.
If you have the means, it’s much better to start your business without borrowing a traditional loan. When founders begin a business, taking out capital in the form of loans means that you’re starting with a deficit already in place. Bootstrapping or working with experienced investors increases the likelihood that your business will thrive for years to come.
Establish Your Financing Methods
Choosing the suitable method of financing your business is one of the most important decisions you will make as a business owner. The manner in which you finance your business will affect how you operate your business in the future. Entrepreneurs may choose to use their personal savings, crowdfunding, traditional loans, or work with established venture capitalists.
The most common forms of financing are bank loans and investors. Each option has its benefits and drawbacks. When you finance your startup using a loan, you can allocate the funds however you choose. However, business loans are difficult to obtain because they often require a few years of business credit history, excellent personal credit, and a thorough business plan. After all, lenders want to ensure that you can pay back the loan.
The additional benefits of a traditional loan are limited, as lenders typically do not offer the same level of support and insight as investors. Since lenders do not gain anything from the success of your business, it is simply not their concern to ensure that your business remains profitable.
In contrast, most investors began their careers as entrepreneurs, which gives them the ability to offer real-world advice. When an investor believes in your business model and offers financial backing, you will not be required to pay them back. If your business fails, this will be considered a poor investment on their part. That’s why investors often go above and beyond to foster your endeavor’s success, helping you to expand your sphere of influence, hire qualified professionals, and scale your business effectively. Furthermore, investors may offer a much more significant amount of capital than traditional lenders.
Fahad Alrajhi Group
There are many different variables that play a role in financing your business. Now that you have an idea of the investment capital that your startup requires, it’s time to seek funding.
Is your business prepared to expand? If you’re seeking venture capital, consider contacting Fahad Alrajhi Group.
Fahad Alrajhi Group seeks to endorse a culture of entrepreneurship and invest in business ideas that radically impact society while diversifying regional economies. If you have an exciting business in alignment with our values, contact us today to find out how we can help make your vision a reality.
