How Much Does It Cost to Start a Small Business?

by Neal Frankle, CFP ®

How much does it cost to start a small business?

This is the most important question you can ask yourself when considering the entrepreneur route. And you have to answer it with a great deal of certainty before you can successfully be in business for yourself.

So what are the cost elements of starting great a small business?

Start-Up Capital

This is the first chunk of cash you’re going to need. This is the money you’ll use to rent facilities, buy your equipment and get set up legally. This also includes all the money you’ll need to spend for product development and launch. All these costs should be spelled out in your business plan.

Here’s a pretty important tip: Do everything in your super-human powers to keep these costs down. Launch the business from your garage or kitchen. Run the business on the weekends. Whatever you have to do…just keep your costs as low as possible. Don’t spend anything you don’t absolutely have to until you start making money. (Read “How to Get Working Capital for Your Small Business.”)

When you think about start-up capital, consider your legal costs, marketing costs, selling, administrative costs and insurance costs.

One reader recently had second thoughts about launching his business because the cost of product liability insurance was too high and the business just wasn’t viable as a result. Check this out early and make sure you take a few extra steps to uncover inexpensive ways to get product liability insurance.

Working Capital

Strictly defined, working capital is the difference between current assets and current liabilities. Clearly, you want to be sure that your current assets exceed your current liabilities. Since you aren’t in business yet, you’ll have to make projections. You do this by developing a pro forma financial statement.

Basically, this is where you lay out what it’s going to cost you to run your business (including selling, marketing, taxes, legal, insurance, etc.). Then, estimate what your sales are going to be. Clearly they will be low when you just start up, but they will hopefully grow over a short time.

You might be thinking that these are difficult numbers to come up with, and I agree. But that doesn’t mean you should wing it and launch your business without carefully accessing your cash needs.

If you have difficulties arriving at these numbers, hire someone to create your business plan. A good business plan will have all these numbers spelled out. If the person who creates your plan does a decent job, you’ll save yourself a fortune by knowing what you’re going to need before you need it. This is a great investment.

The number one reason businesses fail is they don’t have enough money. Then, they need to borrow working capital when the need is the greatest. As a result, they have to pay through the nose for that capital because the lenders know the business owners are desperate.

Don’t fall into that trap. Spend money now to get a business plan if you must but have a good solid business plan spelled out before you launch. This way, you won’t be caught in a desperate situation at the worst possible time.

 

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{ 7 comments… read them below or add one }

krantcents January 12, 2011 at 7:40 PM

Business Plans are necessary whether you are going to borrow money or not. Then stick to your plan. Have access to more money than you need because too many small businesses run out of money.

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Neal@Wealth Pilgrim January 11, 2011 at 6:14 AM

Julie, I agree w/you. The plan doesn’t have to be perfect or even professional. But there must be a plan.

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Julie Kinnear January 11, 2011 at 6:00 AM

I agree with you that to prepare a business plan is rather important when you start up your own business. I believe that many of us can do it by themselves as they can find some information on the various websites. To make sure if it is able to live or if it make sense is useful to ask some specialists for advice. And then all you have to do is work, work and work… Sooner or later you can gather up what you had planted.

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20 and Engaged January 10, 2011 at 2:27 PM

I plan on bootstrapping as much as I can. Starting an Internet business sort of lowers to costs. I have domains, I just need to get the money to incorporate. Marketing costs will be relatively low. I’m excited to get started.

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Jessica07 January 10, 2011 at 9:45 AM

Great advice. I bootstrapped my business, but my husband is just starting one, as well. His is going to take a little more revenue to get started (equipment costs). Right now we plan on selling an asset each time we need to buy a piece of equipment, and we’ll only buy the equipment on an as-needed basis. Keeping costs low is going to be rather tricky in the beginning, but we’re determined not to get a loan.

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moneyedup January 10, 2011 at 9:21 AM

If you have a more casual business that you want to start and you don’t mind getting in front of a camera and putting yourself out there you can find a bunch of crowdsourcing websites where people will help you fund your idea for very little in return. Usually its just a gift or sample of some type that is related to your business.

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Sustainable PF January 10, 2011 at 5:49 AM

Thanks Neal – this could come in handy for us over the next year as we explore entrepreneurship.

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