In this series, entrepreneur, business consultant and AIU School of Business faculty member Belinda Smith, Ph.D., leads aspiring business owners through the essential steps of creating a business plan. This is the fifth post in the series.
You've got a great idea for a business. You know the legal structure that would work best. Now, it is time to determine your business plan start-up costs, or how much funding you will need to position your business for success.
This is done by determining the amount of money you will need to start and operate the business until it reaches break-even status. Break-even simply means the business has earned enough money to cover its expenses. Of course, the ultimate goal of any business is to generate a profit, but it is equally important to be able to pay yourself, employees, and other expenses as the business grows.
First, you need to determine the cost to start your business. Think about items that you will only need to purchase once or no more than once a year; for example, this can include business cards, a computing device, smartphone, office furniture, software and a business license. Then think about expenses you may need to pay each month, such as payroll, rent, insurance, utilities, Internet services, etc. Make a list of these items and their cost.
One of the most common reasons a business fails is owners do not determine all the expenses involved in operating the business. Do not let this happen to you. Write down all expenses. Ask others if there is anything you left off your list. For example, a major item like an automobile and gasoline for that automobile can be omitted from the expense list. If the company leases an automobile, list the lease price, insurance, its inspection costs, and other upkeep costs on the expense list. An automobile is a major expense that, if not considered accurately, could cause the business to fail if there is not enough money to cover that expense.
If your business involves the sale of goods, do not forget to include expenses that will vary monthly because items sold. For example, shipping expenses, commissions, and inventory will vary based on the number of items sold. All expenses need to be listed with their associated costs. A good rule to follow is to have one to five years of expenses designated when you begin.
Another expense often overlooked is ensuring a business has all the money it needs to operate until it breaks even. Before you launch your business, research how much money it will take to operate it for at least six months to a year, or whatever timeline you determine it will take to break even. If you plan to pursue a loan to finance the business, make sure its monthly payments are included on the expense list.
One of the main reasons businesses fail is that they run out of money. The reason businesses run out of money - besides not drumming up enough sales - is that owners do not account for all initial expenses, which includes the cost to operate the business until it at least breaks even.
After listing every expense, separate them into the following categories:
- Start-Up Expenses – items the business will purchase one time.
- Fixed Expenses – monthly and annual expenses that do not change.
- Variable Expenses – expenses that change based on the number of products sold by the business.
These are the expenses that will be included in your business plan start-up costs. You need to have enough money to operate your business until you break even or start generating a profit. This is not rocket science, but is one of the main elements that lenders and investors will look for in your business plan.
In the next post, I will discuss pricing strategies. You will need to know how to price your product or service so you can generate a profit.
Considering starting a business? Download our guide, "The Value of A Business Degree in Today's Challenging Economy."