5 Tips For Estimating Your Start-Up Costs

January 9, 2014 3:35 pm21 commentsViews: 522

start_up_costsBy : Joseph Anthony

Before you take out a second mortgage, use these rules to figure out the realistic costs of setting up a business.

Have a Solid Plan — Then Change It 

Most business start-up stories say that you have to have a business plan. And you do. But that’s not the beginning and end of figuring out your start-up costs.

Jeff Shuman, who directs entrepreneurial studies at Bentley College, says, “The conventional wisdom is that an entrepreneur sees an opportunity, comes up with a business plan to capitalize on it, determines the capital that needs to be raised, raises the capital and then applies it to building the business described in the business plan.”

“There’s one major problem with that model”, says Shuman. It all hinges on getting the business right the first time, and that doesn’t often happen. “In reality, it’s likely that some of your initial assumptions are pretty good and others aren’t going to be worth the paper they’re written on,” he says.

Shuman and others say that figuring out your start-up costs means regularly reviewing your assumptions and changing your initial model. Writing a plan is good because it forces you to write down everything you are going to need to start your business. But that initial plan is likely to change repeatedly as you learn new things and incorporate them into the plan.

Be Willing to Pull Back 

It’s tempting to add up everything you need for the full-fledged business you imagine, and decide it’s what you need to start out. But pulling back and looking for a smaller model can give you a way to get started while also saving money. Shuman uses the example of someone who calculates the total cost of starting a retail business in a local shopping center.  “You could start that way and write a business plan based on that amount,” he says. “But maybe you’d be better off renting a stand and testing what the demand is for your products at that location.”

startupcosts2This consumer testing reduces your initial start-up costs. The result is that the initial cycle of your business is dedicated not so much to generating profits as to generating information. “With this, you can fund your business on a cycle-by-cycle basis,” Shuman says. “When you go for the second cycle and for expanding your business, the numbers are now based, not on focus groups or surveys, but on real-world experience.”

Calculate Prices and Time Correctly 

Calculating your initial cash flow is part of figuring out your start-up costs. It’s an area where businesses are sometimes less optimistic than they should be. “Small business owners may under-price their product or service, thinking they have to come in at the lowest price point to compete,” says Barbara Bird, who chairs the business management program at an American university. “They don’t necessarily need to do that.”

Correctly Estimate Your Start-up Time 

Yes, when beginning a business, time can be money. Let’s say you’re going to have fixed costs such as a monthly lease. If you have to make improvements to a space before you can actually open for business, those fixed costs are going to be additional start-up costs until you can actually open for business. I’ve watched many entrepreneurs draw up a timeline for their ventures and get tripped up on the safety and inspection requirements imposed by local agencies.

For that reason, I think one of the first places a prospective new business owner should go is to the local government planning or license department. Construction permits and inspections can push a prospective opening date back by months. If you fail to take into account the cost of this time, you could be short of working capital right at the start.

Be Realistic About the Cost of Money

Many small business owners finance their ventures by running up big balances on their personal credit cards. Others tap the equity in their homes.

But self-financing isn’t a practical option for larger ventures. Tom Emerson, who directs the entrepreneurship center at Carnegie Mellon University in Pittsburgh, says start-ups should figure in the cost of capital when determining initial expenses and cash flow. “The cost is usually based on what the interest would be, were that cash invested in something with similar risk on the market” Emerson says. “It’s usually a figure that is a few percentage points or more above the prime rate.”


This article was written by Joseph Anthony for EzineArticles.com.  Joseph Anthony is a tax professional in Portland, Ore., who writes about finance and tax issues affecting small businesses.



  • parajumpers online

    Greetings!I’ve been following your blog for a long
    time now and finally got the bravery to go ahead and give you a shout-out from Huffman Tx!
    Just wanted to say keep up the excellent job!

  • Way cool! Some very valid points! I appreciate you penning this
    write-up … and the rest of the website is also very

  • Greetings from Los Angeles!I’m bored to tears at work
    so I decided to check out your site on my iphone during lunch break.
    I really like the knowledge you provide here and can’t
    wait to take a look when I get home. I’m amazed at how quick your blog loaded on my cell phone ..
    I’m not even using WIFI, just 3G .. Anyways, wonderful blog!

  • canadian goose

    I’m really enjоying the template/themе of this blog. It’s simple, yet effectiѵe. A lot of times it’s сhallenging to get that “perfect balance” between supеrb usability and visual appearance. І muѕt say you have done a fantastic job with this. In addition, the blog loads extremely quick for me on Opera. Superb Blog!

  • blouson north face

    All the time, I email this webpage post page to all my associates.
    If like to read it, after that, my friends will too.

  • Greetings! Very useful advice within this article! It’s the little changes that make the most significant changes.
    Thanks a lot for sharing!

  • It’s really a great and useful piece of information. I am glad that you simply shared this helpful information with us. Please keep us up-to-date like this. Thanks for sharing.

  • To the point and written well … ty for the information.

  • Excellent job here. I seriously enjoyed what you had to say. Keep going because you absolutely bring a new voice to this subject. Can’t wait to see more of this from you.

  • michael kors

    This website has got lots of extremely useful stuff on it! Thank you for helping me!

  • Hey very cool web site!! Excellent .. Amazing .. I will bookmark your blog and take the feeds also. I’m happy to find numerous useful information here in the post, thanks for sharing . . . . .

  • Cool post and very informative! I just found your blog and read through a few posts. Although this is my first comment, i’ll be including it in my favorites and visit again for sure.

  • This really is a nice blog i need to say. Normally, I don’t post comments on others’ blogs but would like to say that this post genuinely forced me to do so!

  • This website has lots of really useful stuff on it. Thanks for informing me.

  • barbour cowen

    It is such a great resource which you are providing and you give it away for free. I take pleasure in seeing web sites that fully grasp the worth of offering a high quality resource for free of charge.

  • Well I definitely liked reading it. This post provided by you is very constructive for correct planning.

  • Pretty nice post … I just stumbled upon your weblog and wanted to say that I’ve truly enjoyed browsing your blog posts. In any case, I’ll be subscribing to your RSS feed and I hope you write again very soon!

  • Thanks for helping out, excellent details.

  • michael kors

    Thanks! I found a lot of interesting stuff in your blog. From the tons of comments on your articles, I guess I am not the only one! Keep up the impressive work!

  • Carroll B. Merriman

    I just want to say I am newbie to blogs and actually enjoyed your page. Very likely, I want to bookmark your site . You actually have amazing well-written articles. Thanks for sharing with us your blog site.

  • Thanks for the article. Really Cool.

Leave a Reply


Post Calendar

April 2018
« Nov    

Powered by WP Robot

%d bloggers like this: