How Much Capital/Money Is Needed to Start a Small Business?
Written by Eddy Hood
How much money does it take to start a business? Is this an answerable question? With such a huge variance in the types and sizes of small businesses, the answer can be anywhere from $3,000 for a home-based micro-business to millions for larger-scale enterprises with a large amount of staff. Often, an average “Main Street” restaurant will cost about $100,000 to $500,000 to open its doors, but since there is no such thing as an average business, even that number is misleading. How much money do you need to start a business? To answer that, one needs to do some rudimentary accounting based on the type of business it is. You’ll need to calculate the following:
- Capital expenditures
It’s really not more complicated than that; you’ll need to get your metaphorical hands dirty in calculating some messy numbers. Try your hand at creating detailed lists of these important metrics:
- Capital expenditures refer to one-time purchases needed to open, which don’t often qualify for a tax deduction. This could include furniture, machinery, some of your inventory, and major equipment purchases.
- Expenses, on the other hand, are often deductible and recurring. Wages, advertising fees, utilities, rent (when applicable), and marketing and researching fees are all considered to be normal expenses.
- Assets represent the things that you already have. That could include the money you have in the bank, equipment and inventory you may already own, or even real estate.
Coming Up With the Numbers
How can you calculate this information when you really and truly have no idea where to begin? Most business entrepreneurs begin by taking the time to research. Very few businesses are so unique that they can’t pull from anyone’s prior experience. Here are some viable tactics for finding more detailed information:
- Network with people in your industry to find relative operational costs. Experienced business people are far more helpful than individuals realize.
- Use SCORE, which offers advice from the people who know: retired entrepreneurs.
- Use a helpful startup cost calculator to give yourself some idea of the total numbers.
- Price out retail and wholesale inventory needs with potential suppliers.
- Talk to small business associations, groups, chambers of commerce, and other people who know your local area.
- Ask a business or accounting consultant for advice, like those here at Ignite Spot.
Creating a Cash Flow Forecast
It’s important to answer the question of how much money does it take to start a business, but it’s also important to answer the question of how will the business continue to operate. To do that, you’ll need to prepare a cash flow forecast, which plans out costs (which you should round up) and estimated income (which you should round down). This is often the most difficult step because profits are difficult to anticipate. Plan for the next 12 months using this forecast, and if your business is not profitable by then, you’re not likely to be successful.
However, there are lots of ways to gauge interest and estimate income before actually opening your doors, depending on the type of business you plan to open. Here are some ways you can test the waters:
- Conduct marketing research and use focus groups to find out if people are interested in your product.
- Generate and gauge interest with a Kickstarter project or other crowdfunding venture.
- Appear at trade shows and network with professionals or customers in the industry.
- Find out what other past or equivalent businesses in your area experienced in sales. If they failed, try to find out why (without making assumptions).
When it comes to starting a business, it’s almost always a good idea to start small. So how much money do you need to start a business? Hopefully, this guide has helped you answer that question. If you need more online bookkeeping help, feel free to contact the reliable accountants at Ignite Spot. We’re an outsourced accounting firm that helps many small businesses across the country with its consulting services. Find out more and download our pricing guide for free.