When you’re planning to start a business, these questions are probably the first things that cross your mind.
How much startup capital do I need? Do I have enough money? Can I afford to put up this business?
If you want to calculate the amount of startup capital needed for your business, you simply have to focus on two areas. The first one is the pre-operation expenses and second, the monthly operational expenses.
Having a reasonable assumption of these financial costs will give you a good estimate on how much startup capital you really need to turn your business idea into a reality.
Let’s now look into these in greater detail:
These are the typical considerations for your pre-operational expenses. It’s important to note that writing a business plan will really help you in coming up with a more accurate estimate of these figures:
- Rent. Most lessors in the Philippines ask for 2 months advance and 2 months deposit.
- Equipment. The cost of the machinery you need for the business such as manufacturing equipment and vehicles.
- Appliances. Office equipment such as computers, fax machines, printers and photocopiers.
- Furnishings. These are the tables, cabinets, chairs and other office furnitures.
- Leasehold Improvements. Remodeling costs for your desired location such as carpentry and plumbing costs.
- Licenses, Permits and Insurance. The fees you need to pay to legalize or register your business. This includes the software licenses for computer applications and insurance fees.
- Subscription fees. Application and installation costs of your telephone line, internet connection and other utility bills.
- Supplies. Initial inventory of consumable items such as paper, pens, cleaning supplies, etc.
- Product Inventory. The cost of buying or manufacturing your initial stock.
- Employee Training. Expenses for the skills acquisition of your staff such as seminars they have to attend or cost of employee manuals.
- Advertising. Expenses you’ll incur in promoting the business such as signages, media coverage and other marketing costs.
- Opening expenses. Costs during the official launching or ribbon cutting ceremony, just in case you plan to hold one.
- Miscellaneous. Always have a little extra for unexpected expenses.
Monthly Operational Expenses
You should not expect to break even on your first month of operation. Businesses take time before they start to earn enough to cover overhead costs. Always include these expenses in your startup capital:
- Lease payments
- Business loan payments
- Costs for replenishment of supplies and other inventory materials
- Advertising and marketing expenses
- Staff salary, including government fees such as taxes and social security payments
- Utility bills
- Depreciation costs and expense budget for repair and maintenance
- Income taxes
- Royalty fees
- Other miscellaneous operating costs relevant to your business
The typical formula is to calculate your pre-operational expenses and add three months worth of your estimated monthly expenses to get your required startup capital. Look into expense management best practices to find out how you can run your business in a more profitable fashion. Take note however that depending on the nature of your business, the number of months of operational costs you need to consider could be more than just three. Other businesses may require six months to a year’s worth of monthly expenses as part of their startup costs.
Moreover, avoid starting a business without enough capital and hoping you’ll get more funding as you go along or when the business officially launch. During startup, it’s important to avoid such unnecessary financial stress and focus more on building your business concept and ensuring that it will comply to your vision.
Once you have a pretty good idea of your needed startup capital, you can now put together a plan to acquire the money you need. You may already have the savings to start or you can begin drafting the business proposal you’ll pitch to an investor.
On the other hand, if your estimates show that you’re unlikely to be able to afford such a business, then you can try to down size the concept or simply find another business opportunity that will suit your budget.
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Photo credit: matildasheila