“Financing is tough, and you really have to work hard in the businesses you invest in.” – Greg Brenneman
Keeping start up costs to a minimum is a natural instinct. However, taking this approach can sometimes contradict activity that the business would ideally like to do in order to get the best possible start.
The main thing is that you spend money on what is essential for the business to function well from the outset but don’t waste funds on extravagant extras or perceived “must haves”. Your business planning should assess the costs of every aspect of your start up. In that way, you should end up with a ‘shopping list’ that has defined costs for essential expenditure without taking on excessive debt or ending up with a lack of funds for working capital to support successful progress. A well considered budget needs to include all the initial start up expenditure and the operating costs for at least the first 12 months.
There are several ways to reduce costs both in the pre-start phase and when you begin trading and a good business plan will certainly help to identify areas where opportunities exist to maximise the savings.
- Premises – one of the biggest start up expenses … do you really need them to begin with? One option could be to start from home or use a virtual office or even office share with someone else? This decision will obviously depend on the type of business but is certainly worth considering until the business has money to invest in taking on its own premises.
- Machinery or equipment – assess options which don’t require full payment. Look at leasing/rental, lease purchase, hire purchase or other asset based finance. Although this will require a deposit (typically anything from 10 – 30%) any subsequent arrangement will allow you to spread the full costs over a manageable period of time and can have added value benefits such as tax advantages and access to free upgrades for example.Virtually anything can be obtained on this basis, from office furniture to high value capital items, but lending restrictions may apply and you would need to do your research to ensure your eligibility under the finance provider’s criteria. Some will even consider second hand or used equipment and the opportunity to save even more money.
- Professional fees – look to spread the costs. Most accountants and legal firms now have funding packages which will allow you to spread the start-up costs cost over a period of time to avoid large “one off” bills.
- Supplier support – you could ask for credit from suppliers (or even extended credit terms). This can sometimes be difficult for a new business with no credit history (and often the opposite could be true and you have to pay before goods or services are supplied. The thing is, if you don’t ask, you don’t get.With the right approach you may be able to gain some support from suppliers, particularly if they feel there is the potential for a long term relationship – your success will benefit them as well.
You need to carry out a full assessment of your start-up costs. The following list isn’t exhaustive but can include –
- Equipment/machinery – not just the purchase but it can also include delivery (particularly relevant to large items), site preparation and installation / commissioning.
- Premises – start-up costs include things like deposits (leasing or buying), refurbishment, decoration, utilities installation, security equipment, adjustments for Health and Safety compliance and fixtures and fittings are typical examples.
- Insurance – professional indemnity, product, buildings and contents, goods in transit and employers cover could be relevant to your particular enterprise.
- Vehicles – any insurance associated with running a commercial vehicle as well as the initial purchase or start-up costs for a lease.
- Professional fees – accountants, solicitors, business coaches or mentors and specialist consultants all carry costs and will invariably be required as part of your start up.
- Start up stock or raw materials (real or virtual) – anything you require that goes into your product or service.
- Marketing – anything associated with promoting and selling your products and services will need including. Marketing collateral such as websites, brochures, leaflets, signage and advertising are the obvious ones but also things like business cards and anything you might use at exhibitions or events are other examples. Your website and branding will likely be two significant costs within your marketing budget and an essential part of how you will promote your business (and make your first sale of course).
- Staff – if relevant, anything associated with employing people and it can also include things like corporate clothing or training costs as well as the set up of compliance elements such as employee contracts, handbooks and terms – another recent development is the requirement to provide a work place pension under the Auto Enrolment legislation which will again carry a start-up cost.
These are the main areas of consideration for start-up costs but there could be others which need looking at in relation to your particular area of business. Consider things like licences (or anything regulatory) or trade association membership costs which may be beneficial to your venture gaining more business.
A big part of this exercise is to work out your fixed costs (overheads) for the business over the first year on a month by month basis. This needs to include anything you will have to pay even if you don’t make a sale such as rent/mortgage, rates, IT and communication bills and utilities charges for example.
In addition, you need to factor in your wages or drawings to ensure the business will provide you with what you require and, if relevant, include everything associated with employing people.
Having worked out your start up and first year costs, you will need to do a critical analysis of these against your sales forecasts to ensure the venture has viability. If there are any aspects of the business proposition which cause concern, you may have to review your plan to either reduce costs or look at a areas where you can increase sales.
Becoming established after taking your start-up costs into account can take some time for any new enterprise and although some turn a profit in the first year many will only break even or possibly show a loss. This isn’t unusual and providing you can see an upward curve into profit as you progress beyond the critical first year, and demonstrate it to any funders, that is an acceptable and recognised scenario for start up businesses.
The key thing is that you are realistic and honest about the path your business will take. If you accurately assess and estimate what funds will be required for the start up and sustainability of the business over the first year you increase your chances of survival. It is worth noting that whatever figure you arrive at, its wise to build in a small contingency for anything that might come along unexpectedly.
Find a balance between cost saving and doing enough to make your business a success. Seek advice and speak to mentors, coaches or financial advisers to keep your costs on track.
Thoughts on start-up costs from Yorkshire Powerhouse
One thing that is always a prime consideration running a business is your obligations to financial compliance and regulation Read >