Starting A Business: Start-Up Costs & Priorities

The current economic environment and job insecurity has sent many aspiring entrepreneurs into libraries, their local Chambers of Commerce and to advisors for information on how to start a new business. One of the areas we help our clients with is on their financing options and on prioritizing their needs. The hurdle that every aspiring owner of a small business should address from the “get go” is identifying and managing the funds necessary to cover start-up and operating costs for the first 6-12 months.

Assessing the start-up costs is naturally the place to begin. The start up costs can be influenced by various factors. Consider the following as you make your choices:

What is your vision and ROI expectations?

How competitive is the market you are about to enter?

Would you be competing in promotion-intensive consumer areas?

What’s the geographic area you will be operating in?

Can you outsource certain tasks? Can you lease equipment?

How does the economy affect your products/services?

Are there regulatory hurdles to overcome? Liability risks?

Can you delay hiring full-time employees?

More…?

A recent client came to us with a vision to start a Coffee & Bakery store. He had done his homework, chosen a great location and he had the experience and passion. I liked what I heard, but we needed to work on the “numbers”. We developed a list with all the necessary start-up expenses that will be drawing down his cash. We then set up spending priorities, rating the impact that our choices would have on his vision and on the store’s quality image. We had to consider our options and the inherent “trade offs”. Part of the discussion revolved around the following:

1. The image we wanted to project to prospective customers. The beginning is half of everything.
   
2. Should equipment be leased? Should the roasting of the beans be "outsourced" or needed to roast them in the store with our own roaster?
   
3. Impact of inventory on quality, sales and store image. What is the appropriate “merchandising mix” in the store?
   
4. How extending business hours (adding employees) will affect sales.

Despite the best efforts, it is not always easy to predict or anticipate every single cost driver. My advice usually is to scale back on the "grand vision" in the beginning, unless limited resources is not a factor. Do not allow enthusiasm to get on the way of the “numbers” and of hard realities. Conserving cash should be fundamental in this environment. Look at your options at different levels of your business and consider outside contract help. Include a cushion of 20-40% to account for cost overruns, as you budget your next 6-12 months. And when you are ready to hire full-time employees don’t just think of them as adding a person behind the counter, but rather as adding an advocate for your business, products and services. They have the potential to be your best sales and marketing people and you will need them.