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How Much Money Do You Need To Get Started In Your Own Business?
[NOTE: This post is part of a series on Entrepreneurship 101 to give a kick-start to those who are thinking about starting their own business. Our regular Job-Seeking and Career-Improvement programming will continue soon!]
So, you’ve decided that you’ve got a good reason for being in business AND a good idea for a business to start. HOORAY! Now what?
Now, we need to take the first steps to execute that plan. And that means money, money, money, money, MON-AH!
How much money do you really need to get started? And what areas should you plan on spending the cash on?
Why is this important? Let me tell you a story from my life that illustrates about 90% of all new businesses:
I know a couple who partnered up with another couple to open up a donut shop. They were young, smart, energetic folks (actually, they’re not dead, so I guess they still are!) and had a dream of starting a “family business”.
They scraped together some money and the husband kept his job at a well-known Houston-based computer company, just in case. He would just come in early (really early - the “Time To Make The Donuts” commercials were pretty accurate, as it turns out) and make the doughnuts, staff the counter through the early morning rush, and then go to is “real” job.
Well, it turned out that, in addition to the endless work, they really didn’t have enough money to keep the shop going long enough to pick up a good customer base. And they didn’t have enough money to do real advertising. Not enough money for this, not enough money for that.
And that was the end of their doughnut shop idea.
Money planning is tough. If you can get this area of your business planned well, you’ll be way ahead of the game and your odds of succeeding go WAY up.
So, let’s get started!
GOTTA SPEND MONEY TO MAKE MONEY
Frankly, this is probably the least well-planned area in a new business ventures. With all of the stars dancing in the eyes of newly-minted entrepreneurs, they figure that they’re going to sell so much of whatever in the first month that they’ll be set for years to come.
Then comes reality.
Once you start a business, everyone has their hands out. Rent, utilities, employees, suppliers, advertising….the list goes on and on.
BUT, JUST HOW MUCH MONEY?
Here are the most common areas that you’ll need to figure on spending money:
- Living Expenses - Most business experts’ first advice is to save up enough money to live on for a year before you get started. That’s just for you and your family.
So go after your bills and see how much it costs you to live now for a month. Multiply that by 12 and that is how much you need to sock away just for you to eat regularly.
- Business Fees - By this, I mean any franchise fees you may have to pay or monthly amounts that you have to remit back to a parent organization. If you’re starting a business that isn’t “You, Inc.”, you’ll probably have some costs here.
- Office Expenses - If you’re not going to be a home-based business, you’re going to have to set up an office. This includes renting a space (figure 12 months of rent, since that’s what you’ll be signing in the lease), utilities (you haven’t seen real utility bills until you’ve seen a business’ utility bills - take your home utilities and multiply by between 5 - 10), furniture (gotta sit somewhere), office supplies, etc.
All this stuff ads up quickly and you’ll forget something when you’re planning it out. So make a detailed budget for what you think you’ll spend, then double it.
- Personnel - Obviously, if you’re going to hire some people to help with your business (receptionist and/or secretary being most common in the beginning), you’ll have to figure out how much you’ll pay them.
One interesting thing you’ll find is that, as a new business owner paying people out of your own pocket, you’ll quickly turn into Scrooge. People are all of a sudden worth a lot less than what you should have been paid when you were in the corporate world.
- Sales / Marketing - Most businesses seriously underplan in this area. They bought into Field of Dreams and “if you build it, they will come”. Well, here’s the first big shock of opening a business: If you build it, they will try with all their might to ignore you.
Let’s say you want to place a full-page Yellow Pages ad to start with. It’s a good philosophy in general as, at least in the Yellow Pages, you can appear as big as or bigger than all of your competitors. Generally speaking, a full-page Yellow Pages ad in a major metro area (in the Big Boys yellow pages) is going to run around $12,000 a year.
And that’s just one ad. You’re going to need more ads. ValPak, Local Newspapers, Business Journals, flyers, whatever. You’re going to have to advertise in a bunch of places on a regular basis for people to get to know you and your business.
And that doesn’t include signs, business cards, people in gorilla suits waving at traffic, websites, “Open Houses”, coupons / discounts, or any other marketing costs.
So, what does all of this cost? After you’ve totalled up everything, a good (starting up) marketing budget is between 30% - 50% of the total. Yes, really.
- Technology - Since we’re in 2007 now, most of your employees won’t be wearing green visors, bent over oversized books, scribbling away with pencils. You’re going to need some up-to-date equipment.
Computers, Monitors, Printers, Software (legally licensed is a good thing), Networking Equipment, Phones, Phone Switches. It ain’t cheap. And, if you’re not a computer whiz yourself, you’ve got to hire one of those geeky types to set it all up and get it running.
SMALL BUSINESS IS A LOT LIKE A WEDDING…
Yes, it is. And now you know why most small businesspeople can pinch a penny. It’s expensive putting together a business and, generally, all of the money comes from the owner’s pockets.
To many, this very expensive list seems like an unsurmountable barrier to starting a business. And, to many, it is.
I look at it a lot like a wedding. Can two people get married for $58 bucks and a marriage license? Sure. Do most of them? No.
Most guys (particularly) are overwhelmed with what is involved in planning a wedding. All of the expense, all of the details.
I think weddings, however, are a great indicator of how ready people are to be married. If you’re really willing to go through all of that and make the wedding come off, you’re probably dedicated enough to be married. If it’s too much trouble, let’s just say that marriage probably isn’t the way to go for you.
The same story with a small business. If the up-front preparations are going to scare you off, then you’re definitely NOT ready to run a small business.
BUT, WHERE WILL THE MONEY COME FROM?
Obviously, as the payer, that’s up to you. A lot of people collect money from friends and family while maxing out their credit cards. Some folks see if they can find Venture Capital or and Angel Investor to put up the money.
All of those are options. In my opinion, there aren’t really good options for your first business, but they’re still options.
The best plan is to continue whatever job you’re doing and start putting away large portions of your income now.
Yes, I know that you use up most of your income on “living” and there isn’t much left over. The solution to that, of course, is to live cheaper. Downgrade, spend less, go out to eat less, get a smaller house / rent. There are some more examples in this article at MSN about how to economize after a layoff.
If you can manage all of this, you should be able to save up the money in a couple years or so.
And here’s the harsh reality: If you’re unwilling to do most of these things to come up with the money to start a business, it is unlikely you would have succeeded anyway.
And please, don’t throw the stories of “I started with $50 and a dream” at me. For every 1 of those who was successful, 100 failed. We’re trying to improve the odds to make your business as successful as possible.
Next In The Entrepreneurship 101 Series: Are You a Contractor or a Consultant? What’s the Difference?
Enjoy the Search!
-Dan
Photo by: pacdog
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