One of the daunting questions that every entrepreneur faces when opening a business is: How much capital should I invest?
Realistically, there isn’t a one-size-fits-all number that applies to every business. It can be tricky to figure this number out, but it’s vital to your business’s success. You’ll need that number to create a business plan, apply for a loan, and plan for success.
To help you figure out how much capital you’ll need, we’ve teamed up with business consultant Anna Olson to give you the tools to crunch the numbers.
1. Estimate your one-time startup costs
Come up with a list of things you’ll need that will be one-time hits. For example, will you need office furniture? What kind of supplies or equipment do you need?
One of the best ways to figure out startup costs is to talk to someone who has been in your shoes, Olson says. Talk with an owner that’s in the business and ask questions.
“There is nothing new under the sun, so don’t try to reinvent the wheel. While the internet is full of information, and that can seem like the easiest way to gather information, you shouldn’t discount first hand accounts,” she says.
“When I was starting out, I asked a few people whom I admired who were further along in their businesses to coffee and lunch, to pick their brain and get advice. Ask them specifics about the reality of startup costs and revenues that they experienced starting out.”
2. Estimate your working capital
You’ll need to figure out how much money it takes to keep the business running. From rent to utilities, what kind of money will you need to pay your monthly expenses? You’ll want to come up with a line item list of things you’ll need to pay for, like payroll, taxes, cell phone bills, rent, utilities, and money to market your business.
You don’t have to create this list alone; you can turn to an accountant or business consultant for help. Doing your research before you start your business can save you a lot of headaches and money down the road.
3. Figure out a six-month cushion
Let’s not forget that you have bills of your own to pay. Yes, you need money to keep the business afloat, but you’ll be dedicating a lot of time to your new business and revenue will likely start off slow.
You’ll want to plan ahead, giving yourself enough money to cover your personal expense for at least six months. This way, you won’t be stressed about making a certain amount of money to survive.
This is a good time to familiarize yourself with those key metrics you need to keep an eye on in order to stay on top of your finances.
4. Add forgotten fees
There are a lot of fees that entrepreneurs don’t think about. One of the “hidden fees” Olson forgot about was networking costs. As a consultant, she needed to join associations and groups to start meeting people and find clients. That’s just one of many fees that could come your way. Here’s a quick list of fees that many entrepreneurs overlook:
- Closing costs: If you’re getting a loan, remember to factor in closing costs.
- Legal fees: Whether you hire a lawyer to draw up LLC paperwork or consult with an attorney to hire employees, legal fees can add up.
- Bank set up fees: Some bank accounts come with fees or balance minimums.
- Accounting fees: Whether you consult with an accountant to set up payroll or purchase accounting software like QuickBooks or Xero, you’ll want to factor in the cost.
5. Add a little extra for the unexpected
At some point during the launch of your business, you’ll think of a fee or an expense that you didn’t plan for. Or, you might get a few months in and something unexpected happens like a water pipe breaks.
“I always advise putting in an extra line item for ‘all hell breaks loose,’” says Olson. “Factor it in now so that if something bad does happen it won’t force you to close your doors.”
Add all of these numbers together and you’ll know how much capital you’ll need to start your business.
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