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Starting a new company is an intimidating proposition, and a would-be business-owner's principal concern is cost. Though you may be worried about your cash flow, thorough planning and a careful startup process can help keep your projections on target.
You may envision growing your company into a large-scale operation one day, but at the very beginning, it's smart to keep things small. The good news? Small is cheap.
Cynthia McCahon, founder and CEO of business-plan software company Enloop says business owners should start with a bit of healthy skepticism.
"A prospective business owner should start planning a small business by simply understanding the potential of the business idea," McCahon told Business News Daily. "What this means is not assuming your idea will be successful."
The best approach is to test your idea in a small, inexpensive way that gives you a good indication of whether customers actually need your product and how much they're willing to pay for it, McCahon said. If the test seems successful, then you can start planning your business based on what you learned.
Estimating your costs
While every type of business has its own unique financing needs, there are some rules of thumb that can help you figure out how much cash you'll require. Entrepreneur Drew Gerber, who started a technology company, a publicity firm and a financial planning company, estimates that an entrepreneur will need six months' worth of fixed costs on-hand at startup.
"Have a plan to cover your expenses in the first month," Gerber said. "Identify your customers before you open the door so you can have a way to start covering those expenses."
When planning your costs, don't low-ball the expenses, and remember that they can rise as the business grows, Gerber said. It's easy to overlook costs when you're thinking about the big picture, but you shouldn't guess at your fixed expenses.
McCahon added that underestimating costs can decimate your company.
"One of the main reasons most small businesses fail is that they simply run out of cash," McCahon said. "Writing a business plan without basing your forecasts on reality often leads to an unfortunate, and often unnecessary, business failure. Without the benefit of experience or actual historical financials, it's easy to overestimate a new company's revenue and underestimate costs."
Projecting cash flow
Another important aspect of startup financial planning is projecting your cash flow, so that you don't go into the negatives early on. Bill Brigham, director at the New York State Small Business Development Center in Albany, New York, advised figuring out cash flows for at least the first three months of your business's life. Brigham said to add up not only fixed costs, but also the estimated costs of goods and best- and worst-case revenues.
If you borrow money, make sure you know not only how much you borrowed but also the interest you owe, Brigham said. Calculating these costs puts a floor on the revenues needed to keep the business viable and provides a good picture of the cash necessary to start.
Gerber recommended starting up without borrowing at all, if possible. Borrowing puts a lot of pressure on any business, and its owners, as it leaves less room for error, he said.
Taking the next step
Once you've determined your costs and cash-flow projections, you'll need to consider how to pursue financing. How you obtain funds will impact the future of your business for years to come. Personal savings, loans from family and friends, bank loans, and government loans and grants are only a few of the many types of potential funding sources. Many companies are financed using a combination of sources. [15 Creative Financing Methods for Startups]
One place to go for help is SCORE (www.score.org), which advises small business owners. Formerly the Service Corps of Retired Executives, this volunteer organization partners with the Small Business Administration and offers training and workshops for people who want to be entrepreneurs. Most importantly, SCORE offers counseling from people who have been in the business you might want to be in, and who know the specific issues that you're likely to encounter.
More information and calculators
• Enloop provides free and low-cost business plan services.
• SCORE offers assistance with business plans and projections.
• Business startup cost calculator
• Estimating startup costs from Bplans
• Entrepreneur.com startup cost calculator
• Wall Street Journal startup cost calculator
Additional reporting by Jesse Emspak, Business News Daily contributor.
Originally published on Jul 9, 2010. Updated Jan. 30, 2015.