Paying for This Thing
You can’t start a business for free. Don’t listen to what so many internet marketing “gurus” will tell you. It might only cost $200, but you absolutely, positively must spend money to make money. You must.
If you’re not sure how much cash you’ll need to start your business, you can make some estimates using this handy list (remember that not all of this will apply to you if you’re starting a service business):
|Thing You Have to Buy||Money You Have to Spend on That Thing|
|Inventory – how much stock do you need to have a full shop when you open?|
|Renovations – how much do you think you’ll have to spend on drywall, flooring, paint, electrical, plumbing, and exterior upgrades?|
|Equipment, Furniture, Decoration, and other “stuff” – what do you need to complete the look of your office or store?|
|Permits and Licenses – do you need building permits, operating permits, or occupancy permits to be allowed to do business? At the very least, you’ll need a business license.|
|Lease Payments – do you have to pay a deposit to lease a location? How many months will you have to pay your lease before you can open your doors?|
|Services – do you need a lawyer? An accountant? A consultant or coach?|
|Marketing – advertising isn’t free, sorry.|
|Insurance – get business insurance. Full stop.|
|Other stuff – what did you forget?|
|CASH – yes, you MUST have cash leftover.|
Total up those lines and you have an estimate of what it’s going to cost to start your business. Now multiply that number by two. That’s the range you have to work with (you have underestimated your costs, I guarantee it).
Next up: keeping your doors open. That CASH line at the end of the list above? Yeah. Read on to find out why it’s so important.
It’s Not All about That Base (Line)
It’s not about the top line, either. Of course you have to know your revenue (how much money your business is bringing in). And that baseline, aka your net profit, is also super important because it tells you if you’re spending more money on your business than you’re bringing in. Obviously we don’t want that.
But the commonly overlooked and super crazy important metric that most new business owners ignore – or worse, don’t even know about – is cash flow.
Cash flow is all about how and when money feeds into your business, and how and when it leaves your business.
Think of it like your job (you know, the one you’re about to quit to start your own business?). Most folks work about two weeks before they get paid and can put money in their bank accounts – but in the meantime, there are bills to pay and that means money has to come out of the bank account. Your pay check will replenish that money – and hopefully, it replaces more than you spent. If your pay check is more than the total of your spending, then you have positive cash flow.
However, if your cash flow is negative, you can end up in a whole heap of trouble.
Have you ever been in a position where your rent was due before payday, and you didn’t have enough money to pay it? The timing of the money flowing out of your bank account didn’t align with the timing of money flowing in. That’s negative cash flow. And it sucks.
Your business works exactly the same way, and that’s why you need some extra cash in hand the day you open for business. Money comes in – you make sales, or you get a loan maybe – and money goes out in the form of lease payments, or inventory orders, or debt repayment. If you have to order inventory before you’ve made enough sales to pay for it, you’re in trouble. You need to take on some debt. With forecasting, you can figure out how these bottlenecks might occur and make a plan for dealing with them before they happen.
So whatever budgeting tool you use for your life – you can also use it for your business. For now, anyway. Things will get a little more complicated later.
Where to Get the Money
It’s a good idea to figure out how you’re going to pay for your new venture before you quit your job. These are your basic options:
- Equity Investment
- Love Money (Friends & Family)
You’re always going to be in a better position if you can pay for at least some of your start-up costs yourself. Lenders and investors want you to have skin in the game. Friends and family appreciate it too, and a crowdfunding campaign on Kickstarter or Indiegogo probably won’t cover all of your costs (plus you might not raise enough to get funded).
How to Choose Your Funding Source
Saving Up: In almost every case you can count on having to self-finance some of your costs, so start saving up now. Save up as much as you possibly can. Yes, I did it with $200. But more would have been better. If your start-up costs are really low, I always recommend you pay for them yourself if you can.
Borrowing: Before you say “I don’t want to take on debt”, find out if your bank has a small business lending program. Their terms might surprise you, and I mean that in a good way. Just keep in mind that if you have bad credit, it will be really hard to get a business loan because lenders will see you as a really big risk. Also keep in mind that lenders generally want you to kick in some of your costs too – kind of like a down payment for a mortgage.
Equity Investment: Most times, investors want fast-growth companies, and that’s why you see them funding tech companies most of the time. If you’re going for equity investment, do a lot of research on your potential investors before you pitch them. If an investor mostly funds software applications, she probably won’t fund your restaurant. Investors like you to have some skin in the game too, so if you’re asking for $100,000, make sure you can fund some of the start-up costs yourself too.
Love Money: If you can hit up friends and family for cash, do it – this is the number one source of external funding for new businesses. Did you know that? A word of caution, though: don’t make handshake deals with these people. Sign a legal document outlining repayment terms, interest rates and/or return on investment.
Crowdfunding: It’s harder than it sounds. But if you have a business idea you think can go viral, and you’re really good at spreading the word on social media or you have connections to TV, radio or online publications that will share for you, this could be a good option.
Got a fair idea of what this is going to cost you and where you might get the money? Now it’s time to put your newfound customer knowledge and financial savvy to work by creating a spectacular plan for your new company.