Wondering how much cash you need to start a business? Former bank director and business consultant Don Smith discusses this issue. Keep reading for a business startup cost calculator and some relatively low-cost business ideas.
What You Do Determines How Much Cash You Need to Start a Business
When determining how much cash you'll need, the first question you should ask is what business you will start. It's probably obvious, but the type of business you start will dramatically impact your startup costs.
For example, if you have a mower and your neighbors have grass that needs mowing, you can start mowing yards and creating an income stream with little to no upfront cash. Just knock on doors and get some customers. Our report, 100+ Profitable Business Ideas: Businesses You Can Start for Less Than $10,000, highlights many businesses that require only a minimal investment.
On the other hand, if you're starting a new company making jets, your startup costs will be astronomical. Companies like Boeing have a massive “economic moat.” What that means is it's extraordinarily difficult for a startup to compete with them due to the costs involved plus the contracts and intellectual property they own.
Sample Business Startup Cost Spreadsheet
When figuring your costs, you'll want to create a spreadsheet of items you'll need and expenses you're likely to incur. Here's a sample business startup cost spreadsheet you can use.
For example, if you start a residential maid service, one of those businesses you can start with less than $10,000, you'll need some supplies and equipment. You might add everything up and determine you need $1,500 in supplies and equipment. You'll also want a website, LLC, insurance, bonding, licenses, and marketing funds, so that might all come to another $2,500 or so. If you need a building or storage space or want to hire a business consultant to put your business on the fast track for success, you'll need to figure those numbers as well.
Don't Get Overwhelmed by How Much Cash You Need to Start a Business
When figuring costs for your business, don't get too overwhelmed by a large number. You can bootstrap things by getting only what you absolutely have to have in the beginning. Gradually you can cash flow the other items as business picks up. Once you have your list, you can figure out the priority order.
You can usually lease or get a loan for buildings, vehicles, or heavy equipment just like you would for personal property. For other smaller items, you can take out a credit card in your company's name for some quick funds as long as you have an EIN. Borrowing money to invest in your business can rapidly accelerate your business's progress. Just keep in mind that like consumer debt, business debt racks up fast, so you should keep it to a minimum and make sure you're getting a nice return on what you do borrow.
How Long Until You Can Hit “Ramen Profitability?”
“Ramen Profitability” is a massive milestone for new businesses. You can buy a case of Ramen Noodles for less than $5 and eat for a week if you need to, so it's often a staple in broke people's diets. What “Ramen Profitability” means is that your business is making enough that you can pay your most basic bills. If you've ever been broke enough that you had to eat Ramen Noodles for a week, you know that's not much fun, but at least you can survive.
It's the same with a new business. When figuring out how much cash you need to start a business, determine the break-even point where your new business is making enough to pay its own bills and yours. Take out a calculator and figure out when that will be. How many sales do you need to cover the payments on the things you needed to start the business? What are your estimated business and personal monthly expenses? Based on your projected income and growth, how long will it take to begin covering your monthly expenses?
You should get access to enough funds to cover your living expenses until you can hit this milestone. Starting a business is really a race against time. Until your business is profitable, you're living off what you have saved. For some businesses, you might need to cover your living expenses only for a month or two. Others, it may be a year or more before you hit this number.
Don't be scared to start a business simply because you don't have a ton of cash lying around. You can find financing for many things you'll need. But don't go into it blind either. Write it down, do a little basic math, and you can come up with a rough estimate of how much cash you need to start a business.