Know Your Numbers Before You Open
You are about to start an “official” business. This month, we dig into the numbers.
In my 15 years of advising small businesses, I have found that the most frequent mistakes that new and prospective business owners make is underestimating how much it will cost to start up and operate the business from month to month.
Start With a Simple Rule
The secret to a successful business is simple. Bring in more revenue than you spend. Easy, right? The problem frequently is that new business owners underestimate the startup and ongoing costs. I have had very few who have set their prices too high. There are definitely a large number who overestimate how many sales they will make, however.
Startup costs are those that you have to spend before you open the doors or sell your first item or service. Ongoing expenses keep the business running after you open.
It is difficult for a business to turn a profit in the first year. No matter what industry you are in, you will likely need some money (working capital) beyond the startup costs to get you through the first six months to a year.
Of course, all of these costs vary depending on the business. A home-based business may avoid rent and build-out costs, while some industries require licenses, certifications, equipment, or specialized training.
Use AI to Build a Starting Estimate
AI can help you create a first-pass list of likely startup and operating expenses. Give it specific details such as your location, business size, number of employees, square footage, and anything unusual about your operation. Then ask it to separate ongoing costs into fixed and variable expenses.
· Fixed expenses: Costs that stay relatively consistent from month to month, such as rent, software subscriptions, and some insurance.
· Variable expenses: Costs that rise or fall with sales, such as inventory, credit-card fees, commissions, packaging, and shipping.
Here’s a sample prompt for a coffee shop:
“What startup and ongoing expenses are usual for a coffee shop in Northwest San Antonio? Separate ongoing expenses into fixed and variable costs. What are typical sales for a 2,400-square-foot shop? What additional revenue streams could increase sales?”
Replace the coffee-shop details with your own. You may also want to compare responses from more than one AI tool. Treat the results as a starting point, then verify important numbers with vendors, landlords, industry sources, and professionals.
Watch the Timing of Cash Flow
Not every expense arrives monthly. Insurance, licenses, taxes, subscriptions, and other bills may be due quarterly or annually. A business can look profitable on paper and still run short of cash when a large payment comes due.
For example, if you pay a six month premium on your insurance, you need to make sure you will have the cash needed. Budgeting ahead of that payment will make you less likely to have to purchase items on credit or fall behind on monthly expenses.
Remember: Estimates Are Still Estimates
Understand that these are all estimates. Estimates = Guesses. Research makes the numbers more realistic, but prices, sales, and timing will change. But remember that they are still estimates with validity. Expect them to change over the course of the business.. As you start to open, prices may be significantly higher than you expected. As a result, it’s always a good idea to build a contingency cushion.
Coming Next Month
Now that you have an idea how much you need to start and how much you will need for working capital, where will the money come from? Next month, we’ll talk about sources of startup funding.