This challenging economy and stagnant job market have left plenty of qualified and capable Americans without work. And when qualified and capable people suddenly have time on their hands, many of them will think about starting their own business.
Almost everyone knows that you need a business plan, but one of the most difficult questions to answer when developing that business plan is how much start-up costs will be. There are so many factors to consider, including business licenses and incorporation fees, patents and trademarks, business insurance, leases for an office or production facilities, and many more.
So many, in fact, that it is almost impossible to accurately calculate business start-up costs. Even adding a new location to an existing business can produce wildly different start-up costs when compared to the original start-up experience.
So is it useless to plan? Not exactly, says Theodore Bolema, a professor at South University’s Novi, Mich. campus and director of the business program. Bolema, who holds a Ph.D. in business as well as a law degree, says planning is important – but so is being realistic about the accuracy of your forecast.
“A decent rule of thumb is to figure out what you think your costs will be. Then double it,” Bolema says.
There is a good reason that it is nearly impossible to accurately predict these costs, according to Bolema. “Determining fees, equipment purchases, inventory and the like is relatively easy for most businesses. What’s much more difficult is knowing what your cost of time will be.”
The “cost of time” is an important concept for all businesses, but especially for start-ups. If a business is obligated to pay an office lease or employee salaries while it is not yet able to do business – or a regulatory agency is holding up its ability to do business – then start-up costs will add up quickly.
And don’t expect government agencies to operate with your costs in mind. Even the best-run agency will not move with the same urgency you would like, Bolema says. After all, it may be your lifelong dream and your life’s savings at risk, but to them, you are just another file folder stacked on the desk.
So while you are waiting for an agency to act, or a supplier to supply, or an advertising firm to get that mailer in your customers’ mailboxes, you’ll be paying building leases, business loan payments, utility bills, payroll and all the rest – all without any revenue to offset those expenses.
It can be frustrating, but it certainly will be less frustrating if you build a business plan realistically and raise capital accordingly.
“It’s better to tie up capital in a cash reserve than to have an inadequately funded business plan,” says Bolema.
As in life, there is plenty of uncertainty in business. So hope for the best and plan sensibly, including how long things will take, not just how much they will cost.