By Harrison Maddox / March 14, 2021
Starting a new business is an exciting experience; there’s nothing like the opportunity to put your great ideas and skills to work for you. But in order for your business to be successful, you’ll want to make sure you have everything in the right place. One of the most common questions among entrepreneurs is “how much money do you need to start a business?” Unfortunately, there’s no single correct answer—-some businesses can be run from your bedroom with only a laptop, while others require specialized machinery, staff, licensing fees, and more. So where do you start?
Build A Business Plan
It’s a good idea to develop your business plan before you spend any real money starting a business. Not only does a business plan force you to think critically about the viability and strategy of your business, it helps you visualize the true costs of getting started. You’ll learn a lot about what goes into a business like yours as you go through the market and competitive analysis phases of your plan. What kind of office space do you need? Are there legal fees involved with setting up your business? Will you have anyone on your payroll? Even small things like printing business cards and paying for website hosting can add up—now is the time to dive into the details.
Laying out your business plan in advance will help you more accurately estimate your expenses when you’re starting out, and it’s even required for many business loans. Consider it time well spent.
Do Your Research
Research is your best friend when trying to nail down potential starting costs. Basic internet research can dig up ballpark estimates: A Babson College study found that in 2015 the median startup costs for new entrepreneurs was around $15,000. Microsoft puts it closer to $30,000. Of course, these are merely averages—the true number varies depending on the type of business you want to start. A home-based freelancing business will be relatively inexpensive, whereas a plumbing business might require a service vehicle, tools, licensing, insurance, and more.
For more accurate figures, speak with individuals who have similar businesses (you might reach out via LinkedIn or find a Facebook group for business owners in your industry, or attend an industry conference). Many fields also have membership-based organizations where you can meet others who have been in your place. These industry-specific relationships are crucial to learning the lesser-known expenses you might incur so you can build better expectations.
Hope For The Best, But Plan For The Worst
An often-repeated bit of wisdom to help you be realistic about how much money you need to start a business is to double your anticipated startup costs and half your expected revenue (at least for the first year). Many entrepreneurs tend to be optimistic about how their dreams will play out, and that’s great! But overly optimistic expectations are what sink many fledgling businesses—it may be painful to plan for a grim outlook, but overpreparing will likely pay off.
Another good rule of thumb is to start your business with six months’ worth of operating expenses in hand. New businesses usually take time to get going, so you may find that profits are slim at the start. Making sure you can keep the lights on until your profits pick up will increase your flexibility and reduce your stress.
Additionally, it may be tempting to start off with the best of everything: fancy brand-new equipment, a huge marketing campaign, a fleet of shiny new vehicles, etc. But in most cases, it’s best to minimize your initial investment just in case the business doesn’t work out. It’s a tough scenario to think about, but remember that approximately 20% of new businesses fail within the first two years. It’s better to be safe than sorry. That said, there will likely come a time where you will have to increase your business spending to grow. Timing this spending to avoid overspending and underspending is a difficult balance.
Where Do You Get Money?
Again, this varies for everyone, but know that pulling money from your life savings isn’t always your only option. You might consider a loan from a bank or family member. Search for grants and local economic development programs that you might qualify for. A newer source of startup capital is crowdfunding campaigns. Using sites like GoFundMe or Kickstarter, many entrepreneurs raise their money a few dollars at a time from friends and even strangers who simply believe in their idea and want to see it succeed.
You Got This
While there may not be one definitive answer to “how much money do you need to start a business?”, a little due diligence can greatly improve your chances of a successful first year—and beyond. If you need help getting your business off the ground, don’t hesitate to reach out to us at Get Savvy Digital. We offer a wide range of services for marketing and growing your business.
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