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Home Business: tips for estimating your startup costs
Posted on Friday, October 21 @ 13:58:17 MSD
Topic: Home Business | One of the toughest things in starting a home business is, well, figuring out what it's going to cost you to start. It's tough because startup costs are a moving target, easy to underestimate and almost always subject to change.
Unfortunately, except for perhaps a brief moment at the height of Internet mania, we all know that model doesn't fly. The model that does fly involves calculating and recalculating, and being aware of some of the most common early errors.
Here are five rules that can help you start figuring the cost of starting.
1. Have a solid plan - then change it. Most business startup 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 startup costs.
Writing a business plan is good because it forces you to write down literally everything you are going to need to start your home business -- legal help, tax help, office supplies, equipment, postage, office space, employee salaries, insurance and so on. But that initial plan is likely to change repeatedly as you learn new things and incorporate them into the plan.
2. Be willing to pull back. It's tempting to add up everything you need for the full-fledged business you imagine, and decide that that'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 preserving capital.
3. Calculate prices, time correctly. Calculating your initial cash flow is part of figuring out your startup 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 as low a price point as possible to compete," says Barbara Bird, chair of the management department at Kogad School of Business at American University. "They don't necessarily need to do that."
4. Correctly estimate your startup time. Yes, when beginning a business, time can literally 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 startup costs until you can actually open for business.
5. Be realistic about the cost of money. Many small-business owners self-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.
Carnegie Mellon's Emerson says that startups 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 that similar cash invested in something with similar risk would command on the market," Emerson says. "It's usually a figure that is a few percentage points or more above the prime rate." |
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