Starting A Business
Volume IX
How Much Do I Need ?
Here's a subject everyone thinks is a "No-brainer", but is it? That question is more complex that it seems at first thought. Starting a business engenders an investment that encompasses all expenses from the very beginning. The question is: When does it begin? When does the budding Entrepreneur start incurring costs related to the business? There are a few things to take into consideration, like the cost of research and planning your business. The cost to physically establish your business and the cost of launching it. Last but not least, the cost of operating your business on a daily basis. All of these have to be tallied in order to determine how much capital a new business entrepreneur would need to have readily available one way or another.
As soon as you start to seriously consider opening your business, you will need to research your opportunity and start planning by studying the various options available to you. The very first consideration is the market study for your business proposition. The serious entrepreneur will rely on factual information collected from empirical data. Assumptions based on theory lead to misinterpretations which lead to miscalculation and eventually failure to launch at best or bankruptcy in the Launching Phase (first 6 years) at worse. Even if you have the time and the knowledge to do the research and put together the study, you will most likely have to purchase data from various organizations to assist you in that task. Most chamber of Commerce and professional organization offer, for a modicum of a sum, Data collected on a particular sector for a particular market. Those sources bring gravitas to your research as most funding groups, lending institution or equity investors, would require that you provide a reliable source for the data you are using for your projections in your business plan. You will also need to hire the professional services of an accountant or a consulting firm to put together your business plan according to your directives and your business objective. This point is particularly important if you seek funding from a Lending Institution or equity investors. The neutral element of a third party putting together your business plan adds objectivity and therefore additional weight to your proposal.These sum up The Cost of Research and Planning of your future enterprise.
Depending of the nature of your business, the cost of establishment will vary. However, no business will be without a cost. This cost is essentially summed up by tallied the expenses that are valid only that very first year. Some examples of that are the purchase of equipment, the deposits paid for utilities, the cost of operating licenses and permits. Add to that the cost of furniture, fixtures and supplies but do not forget the cost of initial marketing and communication to announce the grand opening or launch of the company. Often forgotten is the cost hiring and training your employees. It generally takes 6 to `12 months before you actually get your team selected and trained sufficiently so the business can operate somewhat smoothly and everyone to be comfortable in their respective role. Those expenses are not repeated on a month to month or year to year basis, so will not be reproduced in the subsequent years. Nevertheless, those are generally bulky expenses and absolutely necessary to the creation of your enterprise. This will allow you to know exactly and in detail what it will cost to physically establish your business.
What remains, is the cost to operate your business on a day to day basis. It is of the utmost importance you know that figure. That is the only way for you to evaluate whether or not your business is productive enough to sustain itself. You need to know how much it costs to keep that door open. Knowing that, you must know what is your profit margin from your gross sales. With that information, you will know what your minimum sales threshold is to keep your doors open. You can break it down on a daily, weekly, monthly or quarterly basis, whichever is more adequate to the nature of your business. That cost must include, the fixed expenses, such as rent, mortgage, interest payments on debt, any regularly scheduled payment that do not change based on your business volume. Add to that the variable expenses, such as Payroll and payroll expenses, taxes, fees, suppliers, transportation and all other expenses necessary to your business and that are not fixed or are set by the volume of business your enterprise produces.
NOTA BENE:
One important point, I would like to stress is that of payroll for the owners/managers and their working family members. Very often, in small and mid size business, the owners and their working family members occupy one or even multiple positions in the company and do not take a salary for themselves. That is perfectly fine and understandable, one needs to save as much capital as possible to give the company all the chances of survival, particularly in the Launching Phase. It is however the largest mistake they could make. All positions merit a salary. No one works for free. To ignore that cost is to falsify ultimately the balance sheet at the end of the fiscal exercise. The net profit will not be what it should be had each position collected it due salary. That net profit could even transform into a net loss if the proper accounting is done. If the objective is to grow the business, these positions will eventually be filled by someone other that a family member or the owner. When that occurs, the proper salary for that position will have to be computed in the final accountings. So it is important to plan for those salaries even if they are not collected right away. The non collected salaries can be saved in an "Unpaid Salaries" expense account in the accounting journal until such a point where there are funds to pay those salaries, either to the family members or owner who have been performing those tasks or to their successors in those positions. To add those unpaid salaries to the net profit, is not only foolish, since the company will pay taxes on that "false profit" but more importantly, it gives a false picture of the state of the company at the end of the year. It gives a healthier look to the accounts based on fundamentally erroneous data. It is better to plan for the lowest wage for the position in your preliminary budget and then, if need be, increase those wages as the performance of the position holder and the health of the company warrants it. Plan for success and growth. Decline and failure need no planning nor help, they are always just one step behind a major mistep.
As soon as you start to seriously consider opening your business, you will need to research your opportunity and start planning by studying the various options available to you. The very first consideration is the market study for your business proposition. The serious entrepreneur will rely on factual information collected from empirical data. Assumptions based on theory lead to misinterpretations which lead to miscalculation and eventually failure to launch at best or bankruptcy in the Launching Phase (first 6 years) at worse. Even if you have the time and the knowledge to do the research and put together the study, you will most likely have to purchase data from various organizations to assist you in that task. Most chamber of Commerce and professional organization offer, for a modicum of a sum, Data collected on a particular sector for a particular market. Those sources bring gravitas to your research as most funding groups, lending institution or equity investors, would require that you provide a reliable source for the data you are using for your projections in your business plan. You will also need to hire the professional services of an accountant or a consulting firm to put together your business plan according to your directives and your business objective. This point is particularly important if you seek funding from a Lending Institution or equity investors. The neutral element of a third party putting together your business plan adds objectivity and therefore additional weight to your proposal.These sum up The Cost of Research and Planning of your future enterprise.
Depending of the nature of your business, the cost of establishment will vary. However, no business will be without a cost. This cost is essentially summed up by tallied the expenses that are valid only that very first year. Some examples of that are the purchase of equipment, the deposits paid for utilities, the cost of operating licenses and permits. Add to that the cost of furniture, fixtures and supplies but do not forget the cost of initial marketing and communication to announce the grand opening or launch of the company. Often forgotten is the cost hiring and training your employees. It generally takes 6 to `12 months before you actually get your team selected and trained sufficiently so the business can operate somewhat smoothly and everyone to be comfortable in their respective role. Those expenses are not repeated on a month to month or year to year basis, so will not be reproduced in the subsequent years. Nevertheless, those are generally bulky expenses and absolutely necessary to the creation of your enterprise. This will allow you to know exactly and in detail what it will cost to physically establish your business.
What remains, is the cost to operate your business on a day to day basis. It is of the utmost importance you know that figure. That is the only way for you to evaluate whether or not your business is productive enough to sustain itself. You need to know how much it costs to keep that door open. Knowing that, you must know what is your profit margin from your gross sales. With that information, you will know what your minimum sales threshold is to keep your doors open. You can break it down on a daily, weekly, monthly or quarterly basis, whichever is more adequate to the nature of your business. That cost must include, the fixed expenses, such as rent, mortgage, interest payments on debt, any regularly scheduled payment that do not change based on your business volume. Add to that the variable expenses, such as Payroll and payroll expenses, taxes, fees, suppliers, transportation and all other expenses necessary to your business and that are not fixed or are set by the volume of business your enterprise produces.
NOTA BENE:
One important point, I would like to stress is that of payroll for the owners/managers and their working family members. Very often, in small and mid size business, the owners and their working family members occupy one or even multiple positions in the company and do not take a salary for themselves. That is perfectly fine and understandable, one needs to save as much capital as possible to give the company all the chances of survival, particularly in the Launching Phase. It is however the largest mistake they could make. All positions merit a salary. No one works for free. To ignore that cost is to falsify ultimately the balance sheet at the end of the fiscal exercise. The net profit will not be what it should be had each position collected it due salary. That net profit could even transform into a net loss if the proper accounting is done. If the objective is to grow the business, these positions will eventually be filled by someone other that a family member or the owner. When that occurs, the proper salary for that position will have to be computed in the final accountings. So it is important to plan for those salaries even if they are not collected right away. The non collected salaries can be saved in an "Unpaid Salaries" expense account in the accounting journal until such a point where there are funds to pay those salaries, either to the family members or owner who have been performing those tasks or to their successors in those positions. To add those unpaid salaries to the net profit, is not only foolish, since the company will pay taxes on that "false profit" but more importantly, it gives a false picture of the state of the company at the end of the year. It gives a healthier look to the accounts based on fundamentally erroneous data. It is better to plan for the lowest wage for the position in your preliminary budget and then, if need be, increase those wages as the performance of the position holder and the health of the company warrants it. Plan for success and growth. Decline and failure need no planning nor help, they are always just one step behind a major mistep.
With that in mind, you must compute your operating cost for the entire year, add to that your establishing cost, and to that, the cost of research and planning. That will give you an exact figure, the one you need to know before you go to the bank to set it aside from your savings, or borrow from a lending institution or request from your equity partners.
In conlusion:
Research and Planning Cost + Physical Establishment Cost + 1 year of operating cost
= EXACTLY HOW MUCH YOU NEED TO START YOUR BUSINESS
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