Are you wondering how much money do you need to start a business?
How much does it take to start a business?
What are the important aspects you should know!
In this article, we will break down the answer to the question how much money do you need to start a business so you know all there is to know about it!
Keep reading as we have gathered exactly the information that you need!
Let’s dig into our business planning strategies!
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Table of Contents
How much money do you need to start a business
The question sounds pretty straightforward.
You want to start a business, and you want to have an idea as to how much money you’ll need to start it.
However, the answer is not as cut and dry.
Depending on the type of business you want to start, you can expect anything from $1,000 to $50,000 or even over $500,000.
Many factors will play into the cost of starting your own business, such as:
- Type of business
- Business location
- Expertise required
- Equipment required
For example, it may cost much less to start an online business than a conventional brick and mortar business merely due to the difference in the cost of overhead.
Another example would be someone looking to start a restaurant business in downtown Manhattan versus in the suburbs of Oklahoma City.
The same restaurant could potentially cost much more to establish in Manhattan than in an Oklahoma City suburb.
In the end, it’s difficult to specifically give a dollar value of exactly how much money you need to start and operate a business.
But don’t despair, we will provide you with guidance on what you can do to estimate how much capital you need to start a business.
Why should you estimate the capital needed to start a business
It’s important, if not crucial, to know how much money it takes to start a business so you can start your business journey on the right footing.
In some cases, entrepreneurs or company founders have enough personal savings, investments or capital available to start their business.
In those cases, calculating your business startup capital needs will help them ensure that they properly estimate what they need so they do not burn through their personal savings without reaching their business objectives.
In other cases, the company founders intend to raise capital or get a bank loan to compensate for the difference between what they have as personal savings and investments with what’s really needed to start their business.
This is when it’s highly crucial to properly estimate the business capital needs to ensure that:
- The business plan and financial forecast makes sense to the investors, venture capitalists or banks
- The business has the potential to earn enough revenues to help cover the startup costs
- You can ask for the right amount of investment or loan to adequately cover your business startup costs and ongoing needs until the business becomes profitable
There is no magic formula to help you calculate your startup costs.
You’ll need to consider your business idea’s specific needs, how you are looking to implement your vision, the type of market you are targeting, how much your business can earn over time, and how long it may take for it to become profitable.
The better you are prepared, the better the future of your business.
How do you determine the money you need to start a business
The good news is that we have a few tips and strategies to help you calculate your business startup costs so you start on a successful note.
One of the most important things you should do before actually opening your business doors is to define your business objectives and then prepare a business plan.
Before you start pumping money into your business, you should be clear about your business goals and objectives.
Why are you starting this business?
What makes you different from the competitors out there?
What are you trying to accomplish by starting this business venture?
With clear business objectives, mission and priorities, you can then think about how you can achieve them.
Understanding your business objectives means that you must also understand your own personal objectives.
You should be willing to put the time, effort and energy into making the business successful.
Are you ready to make the sacrifices needed?
Once you’ve defined your business’ mission statement, objectives and visions, the next step is to put it on paper.
Preparing your business plan may probably be your first “business” project and lead to one of the most important “business decisions”.
Having a detailed business plan will help you clarify your thoughts and put your business idea on paper.
Writing a business plan is what will help you fine-tune your business strategy, validate the effectiveness and viability of your business idea and come up with your spending plan.
With a good business plan, you will mentally go through the process of starting your business and opening your doors to future clients.
The realities of a business will rarely correspond exactly to what was envisaged in a business plan.
The idea is to go through the process and start tackling questions raised about the business (even criticism) and start making decisions on how to resolve them.
An entrepreneur is fundamentally a person who has a vision or an idea and will continually face challenges to achieve their goals.
If you think about it, an entrepreneur is an expert problem solver!
How to calculate the business startup capital needs
In a nutshell, to calculate how much money is needed to start a business, you’ll need to estimate the following four elements:
- What are your one-time expenses?
- What are your recurring expenses?
- What assets do you already have to bring into the business?
- What is a fair buffer to add to your capital needs?
- How much of an emergency fund should you have?
If you can answer these three questions based on reasonable estimates and forecasts, you’ll have a very good approximation of how much it would take to get your business started.
This is the process of creating a financial forecast.
Let’s look at each of the three elements of the financial forecast.
To start a business, you’ll first need to calculate the things or resources you will need to invest in once to establish your business’s infrastructure.
These one-time purchases may include things like:
- Business permits
- Business licenses
- Business website
- Initial inventory
- Business software
- Office equipment
- Other assets
These are the things that you absolutely need to be able to perform the tasks and functions of the intended business efficiently.
The next step is to calculate all the expenses that you may incur on an ongoing basis.
Depending on the business, you may want to look at having a financial forecast that will cover at least the next twelve months.
You should aim to have a financial forecast for your ongoing costs for two to three years in many cases.
Ongoing business costs can include:
- Replenishment of inventory
- Office supplies
- Marketing expenses
- Payroll expenses
- Insurance costs
- Consulting costs
- Office rent
- Lawyer fees
- Accounting fees
These costs should be carefully estimated as they are recurring.
In other words, you’ll need to pay for them continually.
As a result, you’ll need to estimate how much your business can potentially earn in revenues so you can assess whether the business income is enough to cover your ongoing costs or will there be a shortfall that you may need to cover for a certain period of time.
The longer it takes for your business income and your ongoing expenses to break even, the higher it will cost for you to open a business.
With the initial startup costs and the ongoing costs, you already have a great estimate of how much money you need to get your business up and running.
The next step is to see how much personal savings or assets you already have (along with your business partners) that you want to inject into the business.
For example, if you calculated a total business startup cost of $100,000 and inject $10,000 of your personal savings, you need an additional $90,000 to get started.
In most cases, entrepreneurs will enter into investment agreements or get bank loans to cover their business startup cash requirements.
When investors and banks see that you are committing a good amount of personal funds in the business, they can see that you are truly serious about your business project.
It will surely give them more confidence to give you a loan or purchase equity securities than someone who is not putting a penny!
An important element in assessing how much it will take to start a business is to factor in a cash buffer.
This means that you should plan for the worst (hoping that it will not happen of course!).
It’s nearly impossible to perfectly predict the amount of money your business will need in the future.
If you calculated that you reasonably need $100,000 to start your business, the rule of thumb is to double that up.
This means that you will need to find a way to secure $200,000 to start your business although you know that on paper you only need $100,000.
The worst thing that can happen is that you start a successful business and you need $130,000 and you end up running out of money to realize your dream!
The final element that will help you answer how much money you need to start a business is to establish an emergency fund.
It’s always a good idea to take your financial startup cost estimate and add a 20% to 30% buffer for unexpected things, emergencies or contingencies.
In our example, if we calculated a total of $200,000, it would be a good idea to add another $20,000 to $40,000 as an emergency buffer.
This way you know that you will have some cash tucked away in case of an emergency.
So, how much money do you need to start a business?
This is the question that every single entrepreneur around the world is trying to answer at this very moment!
Starting a business is a rewarding journey but it must be done with care (and in many cases a good risk appetite).
Knowing how much capital you need to start a business is important to help you plan ahead and tackle your business goals and objectives head-on and help you potentially raise money through investors, banks or other financing institutions.
Let’s look at a summary of our findings.
How much money do you need to start a business:
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